Edited version of your written advice

Authorisation Number: 1051420576366

Date of advice: 27 August 2018

Ruling

Subject: Income tax exemption

Issue 1: Income Tax Exemption

Question 1

Is the Association an exempt entity under section 50-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the income of the Association exempt under section 11-15 of the ITAA 1997?

Answer

No

Issue 2: Mutual receipts

Question 1

Does the principle of mutuality apply so as to exclude membership fees, subscriptions and contributions for dinners, functions and gifts received by the Association from assessable income under section 6-5 of the ITAA 1997?

Answer

Yes, in part

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

The scheme commences on:

1 July 2012

Relevant facts and circumstances

1. The Association plays a role in negotiations, assisting to make representations. The Association cannot be registered under the Fair Work Act (Registered Organisations) 2009 (FWA 2009) as it involves negotiations and not the settlement of industrial disputes. The Association has no right to appear and represent members before any tribunal or body.

2. The Association registered for and obtained an Australian Business Number (ABN).

3. The Association received advice from the Tax Office that a TFN had been allocated. The Tax Office has received no lodgements from the Association.

4. The Association’s objects are:

a. The promotion of efficiency among members

b. The fostering of esprit de corps

c. The mutual protection of members

d. The involvement of conditions under which members perform their duties

e. The advancement of the interest of members

5. The Association stated their ongoing activities are:

● Represents the interests of members in discussions to improve conditions. It has a role on the committee that advises about terms and conditions. It has made submissions.

● Represents the interests of members in improving the status of members in the community by making submissions.

● Assisting members by making representations where the member is experiencing difficulties or conflict in the work environment. It provides assistance to members in representing them in meetings and discussions.

● In appropriate cases the Association might make a public comment to correct the record

● Arranging dinners and gatherings, drinks and social functions.

● Co-hosting an annual drinks function with members of the profession.

● Presenting gifts to members who retire.

● Keeping retired members aware of matters of interest.

6. The Association stated their past activities included:

…offered financial support for members who have been involved in litigation.

…also arranged dinners and other social activities to provide opportunities for collegiate support.

… the Association has made submissions about wages.

7. Classes of members include ordinary members and any of the following classes of members:

a. Continuing members

b. Life members, who may be ordinary or continuing members, and

c. Non-voting members

8. Membership is open to any member of the former association and any eligible new members. Every applicant for ordinary membership is proposed by one Association member and seconded by another.

9. New members are eligible for admission as ordinary members of the Association. On ceasing to be an ordinary member, members are eligible to apply for admission as a continuing member.

10. Each membership application is considered by the Management Committee who then determine whether the applicant is admitted or rejected.

11. The membership fee for ordinary members and non-voting members is the amount determined by members at any general meeting. Continuing members do not pay membership fees. The membership fee is currently $100 per annum.

12. The Management Committee is comprised of the President, Vice President, immediate Past President, Secretary and Treasurer, and three additional members all of whom are members of the Association.

13. All the members of the Management Committee retire from office at the annual general meeting but are eligible upon nomination for re-election. Balloting lists are prepared (if necessary) and each member present who is entitled to vote at the annual general meeting can do so. Members can vote by proxy.

14. Neither continuing members nor non-voting members are entitled to vote at a meeting of the Association and neither type of member may be a member of the Management Committee.

15. The functions of the Management Committee, except as otherwise provided by the Rules and subject to resolutions of the ordinary members of the Association carried at any general meeting the Management Committee, are to:

● have the general control and management of the administration of the affairs, property and funds of the Association; and

● have authority to interpret the meaning of these Rules and any matter relating to the Association on which these Rules are silent.

The Management Committee may exercise all the powers of the Association.

16. The Association is a not for profit organisation. The rules state the income and property of the Association shall be used and applied solely in promotion of its objects and in the exercise of its powers and no portion shall be distributed, paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to or amongst the members of the Association.

17. If the Association is wound up and there remains, after satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members of the Association, but shall be given or transferred to some other institution or institutions having objects similar to the objects of the Association, and which shall prohibit the distribution of its or their income and property among its or their members.

18. The Association provided financial statements for the 201A to 201E financial years. During the 201A to 201E financial years the Association’s financial statements demonstrate receipts are comprised of:

● Membership fees

● Professional association fees

● Interest

● Dinner fees

● Contributions towards gifts, and

● Contributions towards events

19. The Association provided background information about the 201A to 201E financial year receipts. The Association advised:

● Association members can pay their professional association membership fees at the same time as their Association fees. The Association then on forward the professional association fees to the professional association. The Association are not a subsidiary of the professional association but do so to assist members.

● There is an annual state conference with no fee for attendance. Every year there is a drinks function hosted collectively. People new to the profession can invite a guest to come along. If people new to the profession who are not members of the Association want to invite guests they are required to contribute $XX each toward the costs of the function. These contributions are used to offset the cost of the drinks.

● The cost of a member dinner is covered by a third party. If a member wishes to bring their partner to the dinner they have to pay the cost of the dinner to the venue. The conference venue will not accept multiple payments for these dinners and wants one payment. Therefore everyone pays the cost to the Association and the Association pays the venue.

● When gifts are purchased members deposit their contributions into the Association bank account and a gift is purchased with the total amount collected.

● Partner’s dinner fees are collected from people new to the profession, not all of whom are members, and paid to the venue.

Relevant legislative provisions

Fair Work (Registered Organisations) Act 2009

Income Tax Assessment Act 1997, Section 6-5

Income Tax Assessment Act 1997, Section 6-10

Income Tax Assessment Act 1997, Section 6-23

Income Tax Assessment Act 1997, Section 11-15

Income Tax Assessment Act 1997, Section 15-2

Income Tax Assessment Act 1997, Section 50-1

Income Tax Assessment Act 1997, Section 50-15

Income Tax Assessment Act 1997, Section 59-35

Magistrates Court Act 1991

Stipendiary Magistrates Act (Qld) 1991

Reasons for decision

Issue 1 Income Tax Exemption

Question 1

Is the Association an exempt entity under section 50-15 of the ITAA 1997?

Summary

The Association is not registered under the FWA or an Australian law relating to settlement of industrial disputes nor are they recognised as a State-registered association by FWA. They, therefore, do not meet the special conditions to be eligible for income tax exempt status as an employee association. Further, the Association is not a ‘trade union’ and is therefore not exempt from income tax on that basis.

Detailed reasoning

An organisation or fund that is not operated for profit, or for the individual gain of its members or promoters, is not automatically exempt from paying income tax. Section 50-1 of the ITAA 1997 describes entities whose ordinary income and statutory income is exempt. Section 50-1 of the ITAA 1997 states:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions.

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45.

Employee association

By virtue of section 50-1 of the ITAA 1997, an entity that is an 'employee association' for the purposes of item 3.1(a) of the table in section 50-15 of the ITAA 1997 is exempt from income tax on the total of its ordinary and statutory income providing it meets the special conditions.

The special conditions are:

a) The entity is registered or recognised under the Fair Work (Registered Organisations) Act 2009 (FWA) or an Australian law relating to the settlement of industrial disputes,

b) The entity is located in Australia, and incurs its expenditure and pursues its objectives principally in Australia,

c) The entity complies with all the substantive requirements in its governing rules; and

d) The entity applies its income and assets solely for the purpose for which the association is established

The Association must meet all the special conditions in item 3.1 of the table in section 50-15 of the ITAA 1997 to be eligible for income tax exemption as an employee association.

Application to the Association

The first special condition that must be satisfied for income tax exemption to apply is that the employee association must be registered or recognised under the FWA or an Australian law relating to the settlement of industrial disputes.

The Association has advised that they cannot be registered or recognised under the FWA or an Australian law relating to settlement of industrial disputes. The Association has no right to appear and represent members before any tribunal or body. As the Association does not meet the first special condition at item 3.1 of section 50-15 of the ITAA 1997 it is not necessary to consider the other special conditions.

The Association is not eligible for income tax exemption as an employee association under item 3.1(a) of section 50-15 of the ITAA 1997.

Trade union

By virtue of section 50-1 of the ITAA 1997, an entity that is a trade union' for the purposes of item 3.2 of the table in section 50-15 of the ITAA 1997 is exempt from income tax. An entity is therefore exempt from income tax as a trade union if:

● it is a trade union; and

● it satisfies the special conditions.

The term trade union is not defined for the purposes of the ITAA 1997. To establish whether an organisation is a trade union, it is necessary to adopt the ordinary meaning of the term.

In the Victorian Employers' Federation v Federal Commissioner of Taxation (1957) 96 CLR 390, Kitto J stated:

The Act contains no definition of “trade union“. The expression is defined in the Oxford Dictionary as meaning “an association of the workers in any trade or in allied trades for the protection and furtherance of their interests in regard to wages, hours, and conditions of labour, and for the provision, from their common funds, of pecuniary assistance to the members during strikes, sickness, unemployment, old age, etc.”

In Norseman Amalgamated Distress and Injustices Fund v. Federal Commissioner of Taxation (1995) 56 FCR 512; 95 ATC 4227; (1995) 30 ATR 356, Justice Lee ruled that the first part of the Oxford English Dictionary meaning was predominant in that an association of employees may well administer a fund for the mutual aid and protection of its members in their time of need, but that association would not qualify as a 'trade union' unless:

…the association of employees in question has been formed to deal with the employers of the members and for the protection and furtherance of the interests of members in respect of the conditions of their employment.

Application to the Association

The Association’s activities include:

● Representing the interests of members to improve conditions

● Represents the interests of members in the community

● Assisting members by making representations where the member is experiencing difficulties or conflict

● They might make a public comment to correct the record

● Arranging dinners and gatherings, drinks and social functions

● Co-hosting an annual drinks function with members of the profession

● Presenting gifts to members who retire

● Keeping retired members aware of matters of interest

The Association’s objects include:

● The mutual protection of members

● The involvement of conditions under which members perform their duties

● The advancement of the interest of members

The Association advised that they are involved in negotiations and not in the settlement of industrial disputes. The Association advised that their members are not employees.

The Association does not negotiate rather they provide assistance to facilitate negotiations for members conditions.

A trade union is an association of employees formed to deal with employers of the association’s members and to protect and further the interests of members in respect to their employment. An association does not qualify as a trade union unless it has these characteristics. The Association’s objects are similar to those of a trade union however members are not employees. Further, the Association does not and has no right to represent their members in dealings in respect to their member’s conditions of engagement. Therefore, the Association does not meet the definition of trade union. As the Association does not meet the definition of a trade union it is not necessary to consider the special conditions listed at item 3.2 of section 50-15 of the ITAA 1997.

The Association is not considered to be a trade union under item 3.2 of section 50-15 of the ITAA 1997.

Question 2

Is the income of The Association exempt under section 11-15 of the ITAA 1997?

Summary

Association receipts do not include any of the specific types of ordinary or statutory income listed in section 11-15 of the ITAA 1997.

Detailed reasoning

Section 11-15 of the ITAA 1997 lists specific types of ordinary income that is exempt under the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936). Provisions under the ITAA 1997 and the ITAA 1936 state that exempt specific ordinary and statutory income fall under the following headings:

● agricultural industry exit grants

● credit unions

● defence

● dividends or shares

● education and training

● family assistance

● financial arrangements

● financial transactions

● foreign aspects of income taxation

● health

● interest

● National Disability Insurance Scheme

● non-cash benefits

● prizes

● shipping

● social security or like payments

● structured settlements and structured orders

● superannuation and related business

● United Nations

● venture capital

● welfare

Application to the Association

Association receipts do not include any of the specific types of ordinary or statutory income listed in section 11-15 of the ITAA 1997.

Issue 2 Mutual receipts

Question 1

Does the principle of mutuality apply so as to exclude membership fees, subscriptions and contributions for dinners, functions and gifts received by the Association from assessable income under section 6-5 of the ITAA 1997?

Summary

Where the Association acts as a conduit for funds these amounts are not in the nature of income (dinner fees, subscriptions, contributions towards functions and gifts). Whilst membership fees are excluded from assessable income under section 6-5 of the ITAA 1997 due to the principle of mutuality, interest income is not a mutual receipt and is assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

The principle of mutuality results in certain receipts not being treated as income.

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 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.

The principle of mutuality is not limited in its application to situations where a refund of surplus contributions is distributed to the contributors

Section 59-35 of the ITAA 1997 ensures that the mutuality principle can apply even though the constituent document of an entity prevents the distribution of surplus to its members. Therefore, particular contributions of members in a non-profit organisation will be mutual receipts if the following elements of mutuality are present:

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

● Identity between the contributors and the participants

● Not in the nature of trade

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. However the interest paid by the members 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.

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 Irrigation Mutual Co-Operative Ltd v FC of T 2004 ATC 4835 (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 & Loans Society Ltd (supra) at ATC 4238-4239; CLR 571-572.

Not in the nature of trade

The courts have long recognised that a company can trade with its members. However, transactions entered into for commercial purposes are not mutual receipts (Revesby Credit Union).

Application to the Association

It is necessary to consider whether the elements of mutuality are present in the Association’s receipts. The receipts include membership fees, subscriptions, interest, dinner fees and contributions towards gifts and events.

Membership fees

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

Members pay annual membership fees. Membership fees are paid by both voting and non-voting members. The Association has a continuous member class who do not pay fees and who are not entitled to vote.

The Association was established for the promotion of efficiency among members, to foster esprit de corps, the mutual protection of members, to be involved in establishing conditions under which members perform their duties and the advancement of the interest of members. A fund was created to meet the objectives of the Association. Members contribute fees to the fund to meet the objectives in the Association’s rules. Membership of the Association gives members access to services and other benefits such as voting rights, conferences and networking functions. All members have equal access to these benefits of membership. The benefits of such a system are shared in common by members.

The Association’s ongoing activities include representing member interests to improve conditions, and the status of members in the community. It assists members by making representations where a member is experiencing difficulties or conflict in the work environment including representing them in meetings and discussions. The Association may make public comment concerning a misrepresented matter in relation to a member. It arranges celebratory dinners, gatherings, drinks and social functions and co-hosts an annual function with members of the profession. The Association also keeps retired members up to date with matters of interest, appointments and retirements and functions. The activities of the Association support their objectives and there is a common fund controlled by the contributors for a common purpose.

Identity between the contributors and the participants

Member classes include ordinary members and any of the following:

● Continuing members

● Life members, who may be ordinary or continuing members, and

● Non-voting members

Membership is open to any member of the former association and new person to the profession who meet eligibility criteria. The Association’s members are the only contributors to the fund, paying members each contributing an annual membership fee.

The Association is a not for profit organisation, its income and property is used solely in promotion of its objectives. On winding up any property remaining after satisfaction of debts and liabilities is to be given to an institution with similar objects. There is identity between the contributors and the participants.

Section 59-35 of the ITAA 1997 will operate to prevent the membership fees being treated as assessable income, as the contribution would be a mutual receipt but for the prohibition on distribution.

Not in the nature of trade

The Association cannot distribute profit as it is a non-profit association. Membership fees are not profit, rather members own contributions for the benefit of the fund. Consideration of the constituent document indicates that the Association is not trading for profit and members are not engaging in any commercial transactions.

Therefore, membership fees contributed to the fund are controlled by the Association’s members for their common purpose, there is identity between the contributors of the membership fees and the participators in the fund and the members are not engaging in activities in the nature of trade.

The elements of mutuality are present and the principal of mutuality applies to membership fees received by the Association.

Professional Association fees

In an email received in 201F the Association stated members can pay their professional association membership fees at the same time as their Association fees and we forward them on. We do this to assist members.

The Association collects these fees on behalf of the professional association, they forward the amount collected on. They do so to assist their members. The fees do not have the characteristics of income.

Interest

The Association receive interest from their investments.

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

The Association has invested funds and their receipts include interest. The Association was established for the promotion of efficiency among members, to foster esprit de corps, the mutual protection of members, to be involved in establishing conditions under which members perform their duties and the advancement of the interest of members. The fund was created to meet the objectives of the Association, interest receipts form part of the common fund which is controlled by the contributors for the common purpose.

Identity between the contributors and the participants

Section 6-5 of the ITAA 1997 specifies that residents of Australia are assessable on income derived from all sources in and out of Australia. Interest income is considered ordinary income and is assessable under section 6-5 of the ITAA 1997.

Taxation Ruling TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation (TR 2015/3) provides guidance on how interest and dividend income of a mutual organisation is treated for tax purposes.

Paragraph 36 of TR 2015/3 states that any interest, dividend or interest income derived by a strata title body from the investment of moneys held in its fund is assessable income of the body corporate unless specifically exempted by the ITAA 1936 or ITAA 1997.

Mutuality can only apply to contributions from members to a common fund for a common purpose. Income from investments, such as interest, is derived from sources outside the fund and is not a contribution by the Association’s members. As such, there is no identity between the contributors and the participants.

Not in the nature of trade

The Association cannot distribute profit as it is a non-profit association and Interest earned by the Association is not earned in the nature of trade.

Therefore, interest received by the Association is controlled by the Association’s members for their common purpose and although interest received by the Association is not in the nature of trade there is no identity between the interest and the Association’s members.

All of the elements of mutuality are not present in interest receipts and as such interest is a non-mutual receipt. It is therefore assessable income for tax purposes.

Dinner fees

An annual dinner is held inviting people new to the profession and their partners. The Association collects member and non-member dinner payments and forwards payments to the venue. They do so to assist their members.

The Association act as a conduit for the dinner fees. The fees do not form part of a common fund. The fees do not have the characteristics of income.

Contributions towards gifts

Members make contributions towards gifts. The contributions are collected by the Association and gifts are then purchased using all the funds collected. They do so to support their members.

The Association acts as a conduit for contributions towards gifts, collecting them so a collegial gift of appreciation can be purchased. The fees do not form part of a common fund. The fees do not have the characteristics of income.

Contributions towards functions

A conference is held annually for new people to the profession. As part of the conference an event is co-hosted with new people to the profession and partners invited. The Association collects payments for the function from members and non-members. The conference function supports the Association’s objectives.

The Association acts as a conduit for the contributions towards functions as they collect the contributions to pay part of the costs of holding the co-hosted conference function. The fees do not form part of a common fund. The fees do not have the characteristics of income.