Edited version of your written advice

Authorisation Number: 1013117482635

Date of advice: 4 November 2016

Ruling

Subject: Income Tax Exempt Entity

Issue 1

Tax exempt entity

Question 1

Is the entity a non-profit organisation?

Answer

Decline to rule

Question 2

Is the entity a tax exempt organisation under section 50-10 of the Income Tax Assessment Act 1997?

Answer

No

Issue 2

Application of the mutuality principle to your circumstances

Question 1

Will the mutuality principle apply to the entity to exclude the levy received from its taxable income?

Answer

No

This ruling applies for the following periods

01 July 2012 to 30 June 2013

01 July 2013 to 30 June 2014

01 July 2014 to 30 June 2015

01 July 2015 to 30 June 2016

01 July 2016 to 30 June 2017

The scheme commences on

1 July 2012

Relevant facts and circumstances

The entity is an incorporated association that advertises and promotes a group of retailers (Retailers) at a specific location.

The members of the entity are made up of the Retailers and any others invited to join by a majority of the Retailers.

The entity's Constitution details that the member's fees are made up of a Levy and that the Levy is to be collected by the Retailer's landlord (Landlord) on the entity's behalf.

The Levy forms part of the Retailers lease, with the lease detailing the amount of Levy to be paid.

The Levy is collected by the Landlord along with the Retailers rent, both of which the Landlord collects GST for.

The Landlord accounts for the GST it collects on the Levy but not for the Levy itself. The Landlord then passes on the Levy, inclusive of GST, to the entity.

The lease does not contain any reference to the entity.

The entity and the Landlord do not have a written agency agreement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 29-80(1),

A New Tax System (Goods and Services Tax) Regulation 1999 subsection 29-80.01,

Income Tax Assessment Act section 6-5,

Income Tax Assessment Act section 50-10, and

Taxation Administration Act subsection 359-5(2).

Reasons for decision

Issue 1 Question 1

Summary

Decline to rule.

Detailed reasoning

Section 359-5 of the Taxation Administration Act 1953 (TAA 1953) provides that a private ruling under Division 359 of the TAA 1953 is a ruling made by the Commissioner on the way in which a relevant provision of tax law applies, or would apply, to an entity in relation to a specified scheme.

As the question “is the entity a non-profit organisation?” does not relate to a relevant provision of tax law the Commissioner is unable to rule on the way in which a relevant provision of tax law applies to the entity.

Issue 1 Question 2

Summary

The entity is an incorporated association established to represent the interests of Retailers at a specific location by doing marketing, advertising and other promotional activities.

We consider that the dominant purpose of the entity is directed towards supporting these Retailers. It is accepted that the entity's activities may benefit the local community but this would be an indirect consequence of the association's activities flowing from the direct benefits provided to the Retailers.

The entity does not satisfy the criteria required to be considered an entity established for community service purposes under item 2.1 of section 50-10 of the ITAA 1997 as it is not established for community service purposes.

Detailed reasoning

To be an 'exempt entity' as described under Item 2.1 of section 50-10 of the ITAA 1997 the following requirements must be satisfied:

1. the entity must be a society, association or club

2. the entity must be established for community service purposes

3. the entity must satisfy the special conditions in section 50-70 of the ITAA 1997, namely

a. the entity must not be carried on for the purposes of profit or gain of its individual members and

i. it has a physical presence in Australia and incurs its expenditure within Australia in pursuing its objectives principally in Australia; or

ii. is a deductible gift recipient; or

iii. it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Society, association or club

The terms 'society', 'association' and 'club' are not defined in the ITAA 1997. Consequently, the terms should be given their ordinary meaning. The Macquarie Dictionary defines an 'association' as 'an organisation of people with a common purpose and having a formal structure'.

The entity is an incorporated association. The entity's objective is to represent the interests of Retailers at a specific location by doing marketing, advertising and other promotional activities.

It is accepted that the entity is an association for the purposes of item 2.1 in section 50-10 of the ITAA 1997.

Established for community service purposes

The phrase 'community service purposes' is not defined in the ITAA 1997. In considering whether an entity has been established for community service purposes it is useful to refer to subparagraph 23(g)(v) of the Income Tax Assessment Act 1936 (ITAA 1936), the precursor to item 2.1 in section 50-10 of the ITAA 1997.

The Explanatory Memorandum for the Taxation Laws Amendment Bill (No 2) 1990 which introduced subparagraph 23(g)(v) of the ITAA 1936 explains at page 13 that:

[T]he words "for community service purposes" are not defined but are to be given a wide interpretation. The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social or economic circumstances.…

Taxation Determination TD 93/190 Income tax: what is the scope of the exemption from income tax provided by subparagraph 23(g)(v) of the Income Tax Assessment Act 1936? (TD 93/190) gives guidance on whether an entity has been established for 'community service purposes'. Paragraphs 3 to 5 of TD 93/190 state:

3. … [T]he Explanatory Memorandum to subparagraph 23(g) (v) confirms that the words 'community service purposes' are to be given a wide interpretation. Those words extend to a range of altruistic purposes that are not otherwise charitable, such as promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community or any members of the community who have a particular need by reason of youth, age, infirmity or disablement, poverty, or social or economic circumstances.

4. However, the provision does not give exemption from income tax to a broad range of organisations that are established within the community, but whose purposes are not of an altruistic nature. Altruistic purposes are an essential element of even the widest interpretation of 'community service purposes'. [emphasis added]

5. It is not accepted that common association as such is altruistic. Neither the purposes of members, nor the purposes of their organisation, are altruistic merely because the members form a non-profit organisation to advance their common interests. Members who seek to advance their common interests are not therefore motivated by an unselfish regard for others, and neither is their organisation. It follows that an organisation established for the purposes of its members is not therefore established for community service purposes.

In order to qualify as a community service association under Item 2.1 of section 50-10 of the ITAA 1997 for exemption from income tax, as well as being non-profit, the organisation must also be altruistic.

In its simple dictionary meaning, altruism may be defined as 'the principle or practice of seeking the welfare of others ahead of one's own' (The Macquarie Dictionary, [Online], viewed 28/10/2016) or 'unselfishness; concern for other people' (The Australian Oxford Dictionary, 2004, 2^nd edn, Oxford University Press, Melbourne).

In order to determine whether the entity is established for community service purposes it is necessary to consider its governing documents, activities and purposes and to consider the circumstances and needs of those who benefit from the entity's operations.

As stated above, the entity's objective is to represent the interests of Retailers at a specific location by doing marketing, advertising and other promotional activities.

The entity's objectives and activities show that they are operated to benefit the Retailers. The entity may benefit the local community however this would be a consequence of the benefits directed to the Retailers. We consider that the entity has not been established for altruistic purposes but that they seek to advance their own common interests and are therefore not motivated by an unselfish regard for others.

The entity does not satisfy the criteria required to be considered an entity established for community service purposes under item 2.1 of section 50-10 of the ITAA 1997 as it is not established for community service purposes.

Issue 2 Question 1

Summary

The mutuality principle does not apply to the entity to exclude the levy received from its taxable income. The nature of the dealings between the Landlord, the entity and the Retailers do not exhibit the necessary mutual principles. In this instance, the fundamental aspect of mutuality, that there is a common fund, is not satisfied.

The dealing is of a contractual nature. As the contributions are made to discharge an individual legal obligation, the requirement that the contributions are made to a common fund is not satisfied. The members have therefore not made a contribution to the common fund and as such they are unable to control the common fund or have the necessary 'identity' between the contributors and the participants.

Detailed reasoning

Section 6-5 and section 6-10 of the ITAA 1997 provides that assessable income of a taxpayer includes income according to ordinary concepts (ordinary income) and statutory income.

Principle of Mutuality

Whether a receipt is income depends upon its quality in the hands of the recipient.

The term income is not defined in the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. In The Bohemians Club v The Acting Federal Commissioner of Taxation [1918] 24 CLR 334, Griffith CJ stated at 337-338:

A man is not the source of his own income, though in another sense his exertions may be so described. A man's income consists of moneys derived from sources outside himself. Contributions made by a person for expenditure in his business or otherwise for his own benefit cannot be regarded as his income unless the Legislature expressly so declares.

The exposition by Griffith CJ has formed the basis of the principle of mutuality as it applies to Australia. As such, a receipt by a taxpayer will not have the quality of ordinary income if the mutuality principle applies to it.

The essence of the mutuality principle is that you cannot derive any gain, and therefore income, from dealings with yourself. The mutuality principle provides that where a number of people associate for a common purpose and contribute to a common fund in which they are all interested, any surplus of those contributions remaining after the fund has been applied to the common purpose that is then distributed to the contributors, is a return of funds and not income or profit.

The mutuality principle was described succinctly by McTiernan J in Revesby Credit Union Cooperative Ltd v Federal Commissioner of Taxation (1965) 112 CLR 564 (Revesby Credit Union) at 574-575:

The principle of mutuality seems to me to be settled. Where a number of people contribute to a fund created and controlled by them for a common purpose any surplus paid to the contributors after the use of the fund for the common purpose is not income but is to be regarded as a mere repayment of the contributor's own money…Incorporation of the fund is not relevant…What is required is that the fund must have been created for the common purpose and owned or controlled wholly by the contributors. If it is owned or controlled by anyone else the principle cannot apply…Furthermore 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, cannot be taken into account in computing the surplus…Also the cases establish that the principle cannot apply unless at any given point in time the contributors to the fund are identical with the beneficiaries of the distribution of the surplus.

The principle of mutuality is not limited in its application to situations where a refund of surplus contributions is distributed to the contributors. In Coleambally Irrigation Mutual Co-Operative Ltd v FC of T 2004 ATC 4835 (Coleambally) the Full Federal Court was not concerned with a refund of overpaid contributions to the contributors. The question was whether the contributions made by members to CIMCL was income in the hands of CIMCL. Beaumont, Merkel and Hely JJ held at 4842:

The authorities establish that the mutuality principle is not confined in its operation to the situation in which the surplus contributions made by a contributor to a common fund are returned to the contributor. In The Bohemians Club v Acting Federal Commissioner of Taxation (1918) 24 CLR 334 the receipt by a social club of annual subscriptions from its members was held not to be income of the club even though, for tax purposes, the club was a separate entity from its members. Griffith CJ held (at 337) that the contributions were, in substance, advances of capital for a common purpose which were expected to be exhausted in the year in which they were paid. They were not income of the club any more than calls made by members of the company upon their shares are income of the company.

No particular criterion is decisive

Anderson J in Royal Automobile Club of Victoria (RACV) v. Federal Commissioner of Taxation 73 ATC 4153 (RACV) at 4157 (citing the view of Lord Wilberforce in Fletcher v. Income Tax Commissioner [1971] 3 All ER 1185 (Fletcher), at 1190), states:

Many criteria have been considered in the numerous cases where one or another criterion has been regarded as determining the issue [of mutuality]. Lord Wilberforce expressed the opinion that, except in the simplest cases, no single criterion was likely to be decisive.

Case law demonstrates that no single criterion is likely to be decisive in determining if mutuality applies and not all factors will be present in all cases.

Existence of a common fund controlled by the contributors for a common purpose

For the principle of mutuality to apply there must be a common fund. It can be described as a fund established by contributors for a common purpose in which contributing members as a class have rights. The fund must be owned or controlled wholly by the contributors. If it is owned and controlled by anyone else the principle cannot apply.

In Sydney Water Board Employees' Credit Union v FCT 73 ATC 4129 (Sydney Water Board) the taxpayer unsuccessfully argued that interest paid by borrowing members of the credit union constituted a common fund paid for the common purpose of enabling the credit union to meet its administrative and operating expenses, with any surplus refundable to borrower members. Interest paid was not maintained as a common fund in which the borrowing members as a class had any rights. Interest was paid by borrowers in discharge of their legal obligations and became part of the general funds of the credit union. It was not paid as a contribution to the mutual liabilities on behalf of the borrowers. Mason J. noted at 4136 that the borrowing members did not have any right to a refund of part of the interest which they have paid; on the contrary:

…the interest so paid forms part of the funds of the taxpayer… the borrowing members are entitled to participate in a distribution of the surplus which results from the taxpayer's use of the general funds.

The existence of a common fund is premised on the existence of identity between what a member of the fund contributes to the fund and the benefit they stand to receive from the fund. Sydney Water Board illustrates the principle that where a member deals with an association as a customer they are not contributing to a common fund, rather they are contracting on an individual basis with the provider of a service on their own account.

Where contributions are made to discharge an individual legal obligation the requirement that contributions are made to a common fund for a common purpose in which all contributors are interested is not satisfied.

In Sydney Water Board the interest payments were made in discharge of a legal obligation. As stated above individual members who borrowed the money from the credit union were personally liable to pay interest on their individual loans. It then became part of the general funds. It was held that the interest paid was not contributions to a common fund and mutuality did not apply. Likewise in FC of T v Australian Music Traders Association (1990) 90 ATC 4536 (Music Traders), individual stall-holders were under a legal obligation to pay for the space leased for the purpose of conducting their own business activity. The parental payments were not mutual income.

Similarly in RACV in relation to the comprehensive and third party insurance each member entered into an individual commercial contract with Club Motor. It was a business transaction and the individual made payments under a legal obligation to do so. Anderson J concluded at 4162:

In my opinion this was a trading activity, both as to the comprehensive insurance and the third party insurance. Both commissions were being paid by Club Motor, an insurance company, for services rendered to it by the appellant. Whether the members paid their premiums direct to Club Motor or to Club Motor via the appellant, there was no payment by members into a common fund in the relevant sense. Nor were members paying for mutual service to be rendered by the appellant. What they were paying for was insurance by Club Motor; each member entering into an individual commercial contract with an insurance company, albeit on advantageous terms. The fact that the channel of the premiums may have been through the appellant and that insurance at a preferential rate was available from Club Motor are irrelevant considerations. Moreover, the payments by Club Motor to the appellant were not payments by a member to a common fund. There is no element of mutuality present in the arrangement with Club Motor. It is a business transaction, pure and simple…

Identity between the contributors and the participants

The principle of mutuality is dependent upon the existence of an 'identity' between contributors to the fund and those who are entitled to participate in it. The mutuality principle may be displaced where there is a difference of identity between those who contribute and those who can receive a distribution of surplus, or where the distribution of surplus is disproportionate to the amount contributed.

In Coleambally, Beaumont, Merkel and Hely JJ said at 4842:

The identity required is not an identity between individuals, but an identity between classes, and all that is required is a reasonable relationship between what a member contributes, and the member's expected participation in the common fund: Sydney Water Board Employees Credit Union (supra) at ATC 4135; CLR 457; Social Credit Savings and Loans Society Ltd (supra) at ATC 4238-4239; CLR 571-572. For the mutuality principle to apply, in one way or another (“in meal or in malt”) the contributing members must be entitled to recoupment or refund of any surplus so that in the result the body corporate does not make a profit from them: Jones v South-West Lancashire Coal Owners Association Ltd [1927] AC 827 at 832. In Social Credit Savings and Loans Society Ltd (supra) at ATC 4240-4241; CLR 576, Gibbs J held that a power in the Society to apply the surplus in a fund in favour of employees of the Society was sufficient to negate the proposition that the fund “belonged” to the contributors.

Furthermore, Beaumont, Merkel and Hely JJ said at 4844:

…if the amounts standing to the credit of the sinking fund truly 'belonged' to the contributors, with CIMCL no more than a convenient vehicle, the members would have a choice as to whether any surplus would come back to the members in the event of a winding up. The denial of that choice by CIMCL's constitution demonstrates that the amounts contributed to the sinking fund do not truly belong to the member contributors. When the members make, and CIMCL receives, a contribution, the contributing members have no right to participate in any surplus of the members' contributions over what may be expended in carrying out the common purpose.

In order for mutuality to exist there must be a reasonable relationship between contributions made by members and what they can expect to benefit from the fund. The return of surplus to contributors need not occur on an annual or other scheduled basis, nor must the surplus be returned in any particular form. Even the application of contributions to build up reserves need not displace the presence of mutuality. What is required is that the collective entitlement must be returned sooner or later, in 'meal or in malt'.

Mutual receipts versus receipts in the nature of trade

The courts have long recognised that a company can trade with its members. The Privy Council considered whether a company could derive a profit from its members in English and Scottish Joint Co-operative Wholesale Society Ltd v Assam Commissioner of Agricultural Income Tax [1948] 2 All ER 395 (Assam Tea). The following facts as described in the High Court judgment, from which the taxpayer appealed to the Privy Council, were accepted by Lord Normand at 397-398:

…the society is incorporated in the United Kingdom under the Industrial and Provident Societies Act, 1893. It has an unlimited capital divided into shares of £5 each… Its objects, as set out in its rules, inter alia, are: 'To carry on the business of planters, growers, producers, merchants and manufacturers and brokers of tea.' The society consists of two members, viz., the Co-operative Wholesale Society, Ltd. and the Scottish Co-operative Wholesale Society, Ltd. The society owns the Deckiajuli estate where it grows and manufactures tea. Except a small portion of produce, which is unfit for export and which is sold locally, the whole of the society's output of tea is sold to its two members at market rates and is exported to England and Scotland. Each year the members of the society pay, by way of advances to the society, sums of money to meet the cost of tea supplied by the society to the members. The market prices of the tea, with which the members are supplied, are debited against these payments. The supplies are recorded as sales to the members. Out of the proceeds from the sales, the expenses of production and management and the interest on loans are paid or provided. By the rules of the society its net profits are applied (a) in depreciation of land… (b) payment of interest not exceeding 6 per cent. per annum on the share capital; (c) appropriation to a reserve fund; (d) appropriation to a special fund for making grants as determined in general meeting; (e) payment of a dividend to members rateable in proportion to the amount of purchases made by them from the society; and (f) the remainder, if any, carried forward to the next account.

In considering whether or not the principle of mutuality applied in this case, the Privy Council concluded that profits were not only likely to arise from the sales of tea to members, but that the generation of profits was in fact contemplated by the rules that provided for their application (at 398). The court went on to say that it was difficult to distinguish the company, in its dealings with members, from an ordinary trading company (at 398):

The application of net profits… is, in essentials, not different from the application of net profits which might be made by any trading company, and it need not result in the distribution of all profits among the members of the society. Thus, any net profits applied under heads (a), (c), (d) and (f) would be retained by the appellant society. When the constitution, rules and business practice of the appellant society so closely conform to the pattern of an ordinary profit-making concern, how can it plausibly be maintained that no profits can result?

This case highlights three points of relevance to mutuality. Firstly, the company's constituent documents in contemplating that profits will be derived are an indication that the company is trading. Secondly, when the business operations of the company conform so closely to an ordinary profit-making business, it would also indicate that the company is trading with its members. Thirdly, this case supports the proposition that just because an association's dealings are with its members, it does not necessarily mean that the association's receipts arising from those dealings have a mutual character.

In Music Traders, the Full Federal Court considered whether fees paid by members of an association to a third party in return for exhibition space at a trade fair, which were then on-paid to the association constituted contributions to a common fund by the members and thus subject to the principle of mutuality, or were in the nature of profit derived in the course of trading. The Australian Music Traders Association was established for the promotion of the interests of people engaged in dealing in musical instruments, records and associated equipment; and the conduct of music trade fairs for the exhibition of goods dealt in by members and others. In the relevant income year, the Association engaged a third party company to organise a trade fair on its behalf. The company sold exhibition space to traders, some of whom were members of the association. Each trader that took exhibition space entered into a written agreement which set out the cost and size of the floor space to be taken. The agreement between the Association and the trade fair organiser entitled the Association to receive out of monies paid by member traders, an amount determined in accordance with a formula relating to floor space occupied. The resulting sum payable to the Association was the amount at issue; was it to be characterised as income, or was it subject to the principle of mutuality, and thus not income.

The majority found that the receipts were not subject to the mutuality principle. Davies J, who was a member of the majority, quoted from the judgment of Lord Wilberforce in Fletcher v Income Tax Commissioner [1971] 3 All ER 1185 at 1189 in posing the question to be answered: 'is the activity, on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or is it, on the other, a mutual arrangement which, at most, gives rise to a surplus?'. Davies J concluded that the activity and the fee received in connection with the activity were not mutual in nature. He said at 4538-39:

The fee paid by the organisers of the fair to the Association was not a fee payable by members of the Association into a common fund. And the fair, though it benefited members of the association, was not a mutual, non-profit activity. Its essence was that of trading for profit by individual traders, though through the medium of a common activity, the fair.

Davies J in the course of characterising the fee paid by the organisers, sought to determine whether the payment was a contribution into a common fund by the members by reference to what purpose the individual traders had in participating in the fair. Put another way, Davies J addressed the question of whether members were making a contribution to a fund for a common purpose or were participating in the fair and making the payments for another purpose. He concluded that the members were participating to generate profits for their own businesses.

Wilcox J, the other member of the majority, in concluding that the members were not making contributions to a common fund said at 4546:

The point, of course, is that the decisions made by individual members as to the extent of their payments depended not upon any wish or need to make members' contributions to the Association but rather upon the display space which they wished to take.

Membership

The relevance of membership to the principle of mutuality was considered by Lord MacMillian in the case Inland Revenue Commissioners v Ayrshire Employers Mutual Insurance Association Ltd (1946) 1 ALL ER 637 at 640 where he indicated:

It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions'. If the transactions are of the nature of (in this case) mutual insurance, the resultant surplus is not taxable whether the transactions are with members or non-members…There is nothing to prevent a mutual insurance company entering a contract of mutual insurance with a person who is not a member of the company.

This approach was adopted in Royal Automobile Club of Victoria (RACV) v Federal Commissioner of Taxation 73 ATC 4153 (RACV), where the taxpayer was a company limited by guarantee that provided certain services and facilities in relation to motor vehicles. They received payments from a number of sources including both members and non-members in relation their services and facilities, together with commissions, interest on investments and rent from property. The court looked at each activity to determine if it had the quality of mutuality. It was held that mutual dealings and business dealings had to be distinguished and apportionment applied. Activities relating to business dealings were considered in the nature of trade and assessable, while activities that were mutual in nature, were mutual receipts even if only some members took advantage of the facility.

If the dealing is mutual, then it is immaterial whether that transaction is with a member or not. Where there is a mutual transaction between an association and a non-member, 'the non-member may be regarded pro tempore as in effect a member of a somewhat wider organisation involving himself and the association' However, for this to occur, the necessary element of mutuality must be present, which is the contribution to and if a surplus, entitlement from the common fund.

An incorporated entity must be an entity for the convenience of its members

The incorporation of an organisation will not of itself affect the operation of the mutuality principle so far as the company has been incorporated as a mere convenient agent or instrument of the common purpose of its members. In Coleambally, Beaumont, Merkel and Hely JJ said at 4842:

In North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293; (2002) 121 FCR 1, the Full Court (Spender, Finn and Merkel JJ) said that it is (at ATC 4302; FCR 13) 'well enough established' that the mutuality principle, in addition to applying to refunds of contributions made to a common fund, may also apply to contributions made and distributions received where the persons who associate for a common purpose and contribute to a common fund have incorporated to effectuate their common purpose, provided the company can properly be treated as an entity for their convenience. In such cases, the fact of incorporation is irrelevant: Revesby Credit Union Co-operative Ltd v FC of T (1965) 13 ATD 449 at 453; (1964-1965) 112 CLR 564 at 574.

Application to you

In order for the mutuality principle to apply to the Levy received by the entity the levy must be properly characterised as contributions to a fund, created and controlled by the contributors, for a common purpose. If, upon analysis, the Levy received by the entity are to be properly characterised as mutual receipts, then the levy will not be income in the hands of the entity.

The first matter to consider is whether the dealing is for a common purpose.

Membership in the entity is voluntary in the legal sense, as the members could leave the entity under their Constitution. Notably, Retailers are automatically members under the Constitution. There are benefits to all members, as well as to any Retailers who may become non-members, in having the retail location promoted and advertised. The benefits of these promotions are shared in common by members.

The second matter for consideration is whether the contributions of members are made to a common fund to give effect to the common purpose.

The principle of mutuality is based on the premise that contributions are made to a common fund for a common purpose in which all contributors are interested. The decision in Music Traders emphasised the importance of determining the purpose of the members making the payments in ascertaining whether those payments are to be characterised as contributions to a common fund. The question to be asked here is whether each member's purpose in paying the membership fees is to contribute to the common fund, or whether, as in Music Traders, there is no common purpose but rather each member makes the payment for their own purpose.

The Taxpayer contends that the Landlord is acting as an agent in regards to the Levy, that they are collecting the levy on behalf of the entity and that this agency agreement was verbal. The Taxpayer contends that the Constitution shows this agency as it states that the Membership Fees from members are to be deemed as the Levy and are to be collected by Landlord on behalf of the entity. The fact that the Levy is paid in proportion to the member's monthly rent is consistent with the concept of contributions to a common fund for this common purpose.

On the other hand, the Constitution would not give raise to a contractual obligation on the Landlord. The Landlord is not obligated under the entity's Constitution to pass on the levy that it collects from the stallholder. If the Landlord ceased to be a member, if indeed it currently is, the Constitution would not be binding on it.

Further, the payments are made by each individual Retailer to the Landlord as part of their contractual obligations. Where contributions are made to discharge an individual legal obligation the requirement that the contributions are made to a common fund will not be satisfied. A contractual obligation to pay the Landlord would amount to a legal obligation. Notably neither the lease nor any other document binding on the Landlord states that there is an agency agreement between them and entity.

The lease agreement between the Retailers and the Landlord requires the payment of the Levy. The Item also specifies the amount owed.

This contractual requirement means that even if the Retailers left the entity or the entity ceased to exist, the Retailers would still have to pay the Levy as they would have a legal obligation to pay the levy to the Landlord. If the Retailers did not pay the Levy the entity that would be able to demand payment would be the Landlord as it would be considered due and payable under the lease.

In regards to the collection of the Levy, the Landlord issues a tax invoice to the Retailers that contain both the Levy and the weekly rent. This tax invoice also adds GST onto both the Levy and the weekly rent. The Landlord then claims the GST on the Levy which it then passes on to the entity with each monthly deposit. As per subsections 29-70 and 29-80(1) A New Tax System (Goods and Services Tax) Act 1999 and regulation 29-80.01 of the A New Tax System (Goods and Services Tax) Regulation 1999 the entity would be required to issue a tax invoice to the Landlord as the Levy would be over the taxable supply threshold.

Additionally, the Retailers claim a deduction for all amounts paid to the Landlord, including the Levy, as part of their business expenditure. If the amount was to be considered as mutual income and the Landlord as a mere agent the Retailers would be unable to claim a tax deduction as the Levy would be a mutual payment.

From these considerations, it is not considered that there is a common fund. The Levy is paid by Retailer to the Landlord as part of their legal obligation arising from contract. The Landlord then pays the entity as part of a trade transaction. Therefore, as the members are not considered to have contributed funds to the entity, the members have not made contributions to a common fund to give effect to the common purpose.

The third matter for consideration is whether control of the common fund is held by the contributors. For the principle of mutuality to apply there must be a common fund that must be owned and controlled wholly by the contributors. If it is owned and controlled by anyone else the principle cannot apply (Revesby Credit Union).

Considering that no common fund has been found to exist, as mentioned above, it is not possible for there to have been a common fund owned and controlled by the contributors.

The fourth matter for consideration is whether there is 'identity' between the contributors and participants. In order for mutuality to exist there must be a reasonable relationship between contributions made by members and what they can expect to benefit from the fund. In Coleambally it was said that if the amounts standing to the credit of the sinking fund truly 'belonged' to the contributors, with CIMCL no more than a convenient vehicle, the members would have a choice as to whether any surplus would come back to the members in the event of a winding up.

As stated previously, it is not considered that any contributions have been made by members to the fund. Therefore, there can be no relationship between the contributions made by members and what they can expect to benefit.

The fifth matter for consideration is whether the receipts from members are mutual in nature or received in the nature of trade. As stated in Assam Tea, reference to a profit making purpose in the constituent documents of the company is relevant for determining whether the receipts from members are in the nature of trade. Furthermore, when the business operations of the company conform so closely to an ordinary profit-making business, it would also indicate that the company is trading with its members.

The Levy is not in the nature of trade because there is no transaction between the members and the entity.

The final matter for consideration is the nature of the entity. The incorporation of entity would not in itself affect the operation of the mutuality principle as it could be incorporated as a mere agent or instrument for its members. Entity is not considered to be a mere agent of instrument for its members for the reasons stated above not due to its incorporation.

Conclusion

On balance, whilst the entity does reflect some aspects of an association of members to which the principle of mutuality will apply, the fundamental aspect of mutuality, that there is a common fund, is not satisfied. The nature of the dealings between the Landlord, the entity and the Retailers do not exhibit the necessary mutual principles.

The dealing is of a contractual nature. As the contributions are made to discharge an individual legal obligation, the requirement that the contributions are made to a common fund is not satisfied. The members have therefore not made a contribution to the common fund and as such they are unable to control the common fund or have the necessary 'identity' between the contributors and the participants.

The Levy is not considered mutual income.