Edited version of your written advice

Authorisation Number: 1013125079299

Date of advice: 18 November 2016

Ruling

Subject: Principle of mutuality

Question 1

Are membership fees received by the Company, mutual receipts, and not income for the purposes of sections 6-5 and 6-10 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Are fees received by the Company from its members for use of its Services, mutual receipts, and not liable to tax under sections 6-5 and 6-10 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 3

Are fees received by the Company from specified non-members, for use of its Services, mutual receipts, and not liable to tax under sections 6-5 and 6-10 of the Income Tax Assessment Act 1997?

Answer

No, unless the specified non-member is also a member of the company

This ruling applies for the following periods:

Income year ending 31 December 2017

Income year ending 31 December 2018

Income year ending 31 December 2019

Income year ending 31 December 2020

Income year ending 31 December 2021

The scheme commences on:

1 January 2017

Relevant facts and circumstances

The Company provides Services to members and specified non-members.

The Company is non-profit

Membership of the Company is open to all Australian residents and non-residents of any age.

The Company will adopt a Membership Scheme where membership is included as part of the use of the Services.

Under the proposed Membership Scheme, the specified non-members will become members of the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5,

Income Tax Assessment Act 1997 section 6-10 and

Income Tax Assessment Act 1997 section 59-35.

Reasons for decision

Questions 1 and 2

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income. Whether a receipt is income depends upon its quality in the hands of the recipient¹. Section 6-10 of the ITAA 1997 provides that assessable income also includes statutory income (amounts included by provisions about assessable income).

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 (Bohemians Club), 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 above comments of Griffith CJ have formed the basis of the principle of mutuality as it applies in 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 is not income or profit.

The mutuality principle was described 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.

A number of authorities have established the application of the mutuality principle in Australia. They include Bohemians Club, Revesby Credit Union, Social Credit Savings and Loan Society Ltd v. FC of T 125 CLR 560 (Social Credit Savings and Loan Society), Sydney Water Board Employees Credit Union Ltd v. FC of T (1973) 73 ATC 4129 (Sydney Water Board), Royal Automobile Club of Victoria (RACV) v. Federal Commissioner of Taxation 73 ATC 4153 (RACV), and FC of T v. Australian Music Traders Association (1990) 90 ATC 4536 (Music Traders).

A mutual association has all of the following characteristics:

n a voluntary association of persons (contributors) who make contributions out of their own moneys to a common fund (which they create, own, control and all have an interest in) for a common purpose (which may also be for their personal benefit as participators) and that purpose is not undertaken for profit,

n contributions are based on an estimate of expected expenses of the common purpose (mutual liabilities), and are made on the stipulation that any surplus (the unused or unexpected amount) will be, sooner or later, returned/repaid to the contributors (in their capacity as contributors) in some form or other,

n complete identity as a class between the contributors and the participators, and

n a reasonable relationship between what a member contributes and what the member may be expected or entitled to receive in respect of the common fund.

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.

Anderson J in RACV stated (at 4157):

Many criteria have been considered in the numerous cases where one or another criterion has been regarded as determining or not determining the issue [of mutuality]. Lord Wilberforce expressed the opinion that, except in the simplest cases, no single criterion was likely to be decisive.

Fees from members

The receipts paid by members can be characterised as contributions to a fund, created and controlled by the contributors, for a common purpose which is not undertaken for profit.

A reasonable relationship exists between the fees contributed by a member and the rights and entitlements they have to the common fund (the Company).

In Coleambally Irrigation Mutual Co-operative Ltd v FC of T 2004 ATC 4126 (Coleambally), the court found that where a constitution prohibits distribution to members on winding up, the connection between those who contributed to the common fund and those who participated in the common fund is broken so as to prevent the principle of mutuality from applying (at 4842-4843):

For the mutuality principle to apply, in one way or another (“in meal or 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….

CIMCL's constitution is such that once the contributions are made, the monies contributed can no longer be said to “belong” to the members, either in a formal or a substantive sense. The contributions may only be applied in the manner specified … whilst CIMCL is a going concern, and may not be distributed amongst CIMCL's members on winding up. The mutuality principle requires there to be a pooling of funds which can only be expended in pursuit of the common purpose, or returned to the contributors… Rules 71 and 75 of CIMCL's constitution are such that the sinking fund does not satisfy this description.

In response to the decision in Coleambally, section 59-35 of the ITAA 1997 was enacted to ensure that contributions from members to an entity (common fund) would continue to be treated as mutual, where the constituent document of the entity prevents the distribution of money or property to its members.

Section 59-35 of the ITAA 1997 operates to treat what would be a mutual receipt, as non-assessable, non-exempt income. No provision in the ITAA 1936 or ITAA 1997 operates to treat mutual receipts as assessable income.

The Company's constitution provides that on dissolution any surplus property must be given to a company with similar objects. Section 59-35 of the ITAA 1997 will operate to prevent the member receipts as being treated as assessable income and will cause the member receipts to be treated as mutual receipts.

As such, member receipts will not be included in the assessable income of the company under sections 6-5 or 6-10 of the ITAA 1997.

Question 3

Detailed reasoning

The mutuality principle provides that where a number of people voluntarily 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 is not income or profit (refer to questions 1 and 2).

As discussed in questions 1 and 2 the principle of mutuality will apply to member receipts. However, in addition to member receipts, the Company also receives receipts from the use of its Services from specified non-members.

The Commissioner's view on the principle of mutuality is contained in the publication Mutuality and Taxable Income (QC 23099), which states the following regarding the meaning of member:

Meaning of Member

For the purposes of mutuality, we accept that a person is a member of an organisation where the person has done all of the following:

Applied for membership…

Been accepted by the organisation

Paid the appropriate membership subscription

Once a person has applied for membership and has been accepted by the organisation as a member, they are bound by the organisation's constitution and any rules or by-laws of the organisation.

…

The general principle is that temporary, honorary or social members who have not been through the above membership process are visitors for tax purposes. This also applies to reciprocal members - that is, members of another organisation sharing reciprocal arrangements.

Currently, there is no provision in the constituent documents of the Company which causes the specified non-members to be members of the Company. The specified non-members are not considered members of the Company for the purposes the Company's constitution. The specified non-members have not voluntarily associated as members of the Company for the purposes of the Company and therefore their contributions will not form part of the common fund.

In RACV, Anderson J made the following comments about dealings with non-members (at 4157):

… If it so happens that outside the social aspect of a club, …, there is the provision of facilities of which members and non-members may avail themselves, the particular dealing with a member in relation to the use of the facility, even at a charge, may well be a mutual dealing, whereas the particular dealing with a non-member would not be a mutual dealing.

Where the Company trades with non-members, the receipts from the non-members are assessable income and the principle of mutuality will not apply.

However, the Company will transition to a membership scheme whereby membership will be included as part of the use of the Services. As a consequence, a specified non-member who uses a Service of the Company will become a member of the Company.

Following the adoption of the membership scheme, all users of the Company's Services will be members of the Company.

As discussed in questions 1 and 2, the principle of mutuality (and the operation of section 59-35 of the ITAA 1997) will apply so that member receipts are not assessable income of the Company.

¹ Scott v Federal Commissioner of Taxation (1966) 117 CLR 514