Edited version of your written advice

Authorisation Number: 1013081315116

Date of advice: 1 September 2016

Ruling

Subject: Mutuality Principle

Question 1

If the taxpayer adopts the data analytics procedure as stated in the private ruling application to determine the member number inputs for the Waratah's formula, is this method of data collection acceptable for the use of the Waratah's formula?

Answer

Yes

Question 2

If the member number inputs method is accepted can the taxpayer amend prior year returns still within the amendment period if the same methodology can be applied to prior year data?

Answer

Yes, from the start of the financial year in which the new data analytics system was implemented

This ruling applies for the following periods:

1 January 20XX to 30 December 2026

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Club derives a significant proportion of its revenue and profit from member activities. However, the traditional methods for determining member and non-members inputs for the Waratah's method do not provide an outcome that is consistent with management's understanding of the true relationship between member and non-members participation at the Club. The traditional methods have determined an historical non-member percentage of approximately 46%.

The Club commissioned a data analytics review of it records which determined a non-member percentage of closer to 28%, which is a figure closer to management's understanding of a 70/30 member/non-member split of attendance.

The Club has digital systems which capture a vast body of data reflecting most, if not all, key activities by members and non-members within the club. These systems capture data which records every individual transaction separately for each member or non-member including the member number, date, time, location and any specific transaction information (e.g. food or beverage purchases, kiosk, prizes and gaming machine spend), for every transaction every day the Club operates during the year.

The Club has in place a member loyalty program which encourages members to utilise or swipe their membership cards when entering the club, when buying food and beverages, and when playing gaming machines in the Club.

It is proposed to use all of the systematic core transaction data captured by the Club as the basis for determining the key member and non-member visitation inputs to the Waratahs Calculation.

This method captures 100% of the actual transactions for every day of the relevant year of income. It avoids the need for surveys and other non-systematic methods of collecting the key inputs to the Waratahs Calculation.

These systems capture all key activities of both members (at the individual member number level) and non-members across all key income generating areas of the Club's operations, at the individual transaction or record level.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

The principle of mutuality is based on the premise that you cannot derive income from yourself. The principle provides that where a number of people contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income (Bohemians Club v. Acting Commissioner of Taxation (1918) 24 CLR 334; [1918] HCA 16).

Mutuality is limited in its application. It does not include 'any contributions to the fund derived from sources other than the contributors' payments, such as interest from the investment of part of the fund, or income from a business activity conducted by the members...' (Revesby Credit Union Co-operative Ltd v. Federal Commissioner of Taxation (1965) 112 CLR 564 at 574).

In Carlisle and Silloth Golf Club v. Smith [1912] 2 KB 177 it was held that to the extent that the club received payment for green fees from non-members for the use of the club's golf course, these receipts were from trading and were liable to tax in respect of profits attributable to non-members' green fees. There was mutuality as far as members were concerned, but not so far as non-members were concerned (RACV v. FCT (1973) 4 ATR 567 at 570).

Thus with clubs, societies and associations in circumstances where it can be established that the mutuality principle applies, mutual receipts from associated entities sharing a common purpose, contributing to a common fund have been found not to constitute ordinary income. Whereas receipts from outsiders who are not members are not contributing to a common fund, these amounts, provided they exhibit the characteristics of income are considered ordinary income and taxable under section 6-5 of the ITAA 1997.

Taxation Determination TD 93/194 Income tax: how should a licensed club apportion expenses when calculating its taxable income? (TD 93/194) at paragraph 2 identifies expenses being:

a non allowable (non-deductible): as those that relate specifically to members such as members functions

b wholly allowable expenses (deductible): being specifically related to non-members (for example, non-member only promotions), expenses relating to wholly assessable income (such as investment expenses) and non-apportionable deductions including contributions to staff superannuation, where the Act provides for claims to be deductible in full, and

c partially allowable (apportionable): expenses which cannot be specifically identified as either member or non-member related, relating to both.

The Club operates its premises and trading activities for both members and non-members, therefore expenses will be incurred in producing both assessable income and mutual receipts. In other words there will be partly allowable or apportionable expenditure.

Such expenditure must be apportioned on a reasonable basis. In this situation, the Club can choose a practical and suitable method of apportioning the expenses. The method will be acceptable provided:

1. There is a reason for apportioning the expenditure.

2. The method chosen is suitable for that type of expenditure.

3. The method chosen is reasonable and is not arbitrary.

4. It gives a correct reflection of the expenditure incurred.

Apportionment methods

Mutuality principle apportionment methods are explained in Mutuality and taxable income QC 23099 on the ATO's website as follows:

Before choosing one or more methods, it is important that you correctly identify whether an individual is a member or non-member as the separation of the apportionable items relies on this accurate identification.

Apportionment methods include:

a. simple methods

b. the Waratahs formula, and

c. other methods.

The method (or methods) an organisation chooses must reasonably and accurately reflect its revenue and expenses.

An organisation may use one or more methods to separate its apportionable items for the year in question.

In determining a method of apportionment, consideration of a basis for such will only relate to those expenses which cannot be identified specifically as a member or non-member expense.

The Commissioner provides guidance in relation to the appropriate method of apportionment for registered and licensed clubs which states:

The Waratahs formula is a base formula for isolating member and non-member contributions to income of an organisation, and it simplifies the process for separating expenses that cannot be easily identified as either member or non-member.

The formula is accepted as a reasonable basis for apportionment, particularly for registered and licensed clubs.

The proposal is for the Club to use data analytics to capture the data required to complete the Waratah formula as opposed to historical periodic surveys and other sample based methods previously used by the applicant.

The use of data captured from the core digital systems to determine the components of the Waratah would, based on the facts, provide more reasonable and accurate data for the purposes of apportioning income and expenditure between members and non-members.

If the appropriate data has been contemporaneously collected in the subject years enabling the Club to calculate more accurately apportionable assessable income under section 6-5 of the ITAA 1997, or deductible expenses under section 8-1 of the ITAA 1997, the Commissioner may amend prior year returns. This would apply from the start of the financial year in which new data analytics system was implemented.

The Commissioner also accepts that it would be reasonable for the Club to apply the data analytics method to determine inputs for the Waratah formula for future years to determine an accurate apportionment of member and non-member percentages of revenue and expenses.