Edited version of private advice

Authorisation Number: 1051526189014

Date of advice: 6 June 2019

Ruling

Subject: Principle of Mutuality

Question 1

Are the voluntary levies received by Organisation A from its members mutual receipts and therefore treated as 'non-assessable non-exempt' income of Organisation A under section 59-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the funds from ticket sales received by Organisation A from its members mutual receipts and therefore treated as 'non-assessable non-exempt' income of Organisation A under section 59-35 of the ITAA 1997?

Answer

Yes

Question 3

If the answer to question 2 is yes, should the expenses attributable to such events be apportioned on the basis of funds received from members over total funds received from the event, and this portion treated as non-deductible?

Answer

Yes

This ruling applies for the following periods:

Year of income ended 30 June 2020

Year of income ended 30 June 2021

Year of income ended 30 June 2022

Year of income ended 30 June 2023

Year of income ended 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Organisation A

Organisation A represents businesses within a particular industry within Australia.

Organisation A is a corporation limited by guarantee established for specified objects.

Organisation A is a member based organisation, with all members involved in the industry or representing the major sectors within the industry.

Organisation A is a taxable not-for-profit entity for the purposes of taxation legislation.

Organisation A receives membership fees directly from its members. This income is exempt from income tax under the principle of mutuality.

Organisation A is the sole member of both Organisation B as well as Organisation C which is now in the process of being wound-up.

Organisation A provides services to its members in accordance with its objectives.

Organisation A also receives ticketing income from events held for members. Organisation A hosts a number of events of which both members and non-members attend. Some of these events are ticketed for both members and non-members (albeit members receive a discount). Members can purchase multiple tickets, and a number of employees or representatives from those member entities will attend the event

Organisation B

·        Organisation B is a company limited by guarantee.

·        Organisation B has a specific function within Organisation A's industry.

·        From 1 July 2019, Organisation B's primary source of funding will be provided by Organisation A from the collection of voluntary levies.

·        The sole member of Organisation B is Organisation A.

The voluntary levy

·        The voluntary levy is applied to specific invoices paid by industry participants. It will be collected by suppliers and then paid to Organisation A on a quarterly in arrears basis.

·        The voluntary levy is set at a specified percentage of total invoice price.

·        No separate invoice is issued by the supplier to the industry participant. The levy amount is added to the gross spend and included in the normal billing arrangements between supplier and participant.

·        Not all Organisation A members participate in paying the voluntary levy, but a majority do.

·        The voluntary levy is also paid by some industry participants that are not members of Organisation A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 59-35

Reasons for decision

Summary

The voluntary levies received by Organisation A from its members are mutual receipts and therefore treated as 'non-assessable non-exempt' income of Organisation A under section 59-35 of the ITAA 1997.

The funds from ticket sales received by Organisation A from its members are mutual receipts and therefore treated as 'non-assessable non-exempt' income of Organisation A under section 59-35 of the ITAA 1997. The expenses attributable to such events can be apportioned on a reasonable basis, and the portion that relates to mutual receipts is not deductible.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that 'assessable income' includes income according to ordinary concepts. Whether a receipt is income depends upon its quality in the hands of the recipient: Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at p. 526. The mutuality principle provides that where a number of people come together 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 purposes that is distributed to the contributors, is a return of funds and not income or profit. That is, income is not derived from dealings with oneself.

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.

A number of authorities have established the application of the mutuality principle in Australia. They include Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334; [1918] VLR 234; (1918) R and McG 12; (1918) 24 ALR 92; [1918] HCA 16, Revesby Credit Union, Social Credit Savings & Loan Society Ltd v. FC of T 125 CLR 560, Sydney Water Board Employees Credit Union Ltd v. FC of T (1973) 73 ATC 4129, 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).

From this case law, a mutual association will have the following characteristics:

·        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,

·        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,

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

·        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.

Anderson J in 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.

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 contribute to the common fund and those who participate in the common fund is broken so as to prevent the principle of mutuality from applying. As a result of the decision in Coleambally, section 59-35 was enacted to provide that an amount that would be a mutual receipt but for an entity's constituent document prohibiting distributions to members, will be non-assessable and non-exempt income. Subsection 6-15(3) specifically excludes from assessable income any amounts that are non-assessable and non-exempt.

Additionally, not all receipts received by a mutual association will necessarily be mutual. In North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293 the court stated

... not all receipts by a club from members or from a third party on account of services or facilities made available to members are necessarily mutual receipts... They may be no more than trading receipts. It is the nature of the actual transactions in question, and not the fact that a benefit was received or a service used by members that will determine whether receipts derived are liable to, or immune from, tax (at 4306).

Receipt of the voluntary levy from Organisation A members

Organisation A was established for specific purposes, including the functions provided by Organisation B.

The voluntary levy that is collected by the suppliers will be remitted to Organisation A on a quarterly basis and will be held by Organisation A until such time as it is required by Organisation B for its specific activities. It is accepted that the levy monies from Organisation A members, once received by Organisation A, will constitute a 'common fund', for the specific purposes. The common fund will be controlled by Organisation A members, and paid to Organisation B to facilitate the carrying out of its purposes.

The amount of the levy contributed by Organisation A members is based on each member's spend and therefore there is a direct connection between the amount of levy paid by Organisation A members and the purposes of Organisation A. The benefits will be shared in common by members. The fact that the voluntary levy is paid in proportion to the member's spend is consistent with the concept of contributions to a common fund for this common purpose.

The levies received by Organisation A from its members have all the characteristics of mutual receipts except for Organisation A's constitution prohibiting the distribution of profits to its members. However section 59-35 of the ITAA 1997 provides that where an amount would be a mutual receipt but for the constituent documents of the entity preventing the distribution of money or property to its members, that amount will be treated as non-assessable non-exempt income.

Therefore under section 59-35 of the ITAA 1997 the levies received from Organisation A members will be non-assessable non-exempt income, and specifically excluded from assessable income under subsection 6-15(3).

Ticket sales paid by Organisation A members

Similarly, the funds from ticket sales received by Organisation A from Organisation A members are accepted to be in the nature of mutual receipts and therefore will be non-assessable non-exempt income under section 59-35 of the ITAA 1997, and specifically excluded from assessable income under subsection 6-15(3).

Receipts from non-Organisation A members

In case there is any doubt, any amounts of levy or receipts from ticket sales that are paid to Organisation A from non-Organisation A members, are not mutual dealings and will be assessable income of Organisation A.

Apportionment

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

As the receipts from ticket sales made to Organisation A members represent non-assessable non-exempt income, and therefore excluded from Organisation A's assessable income, no deduction is allowable for any losses or outgoings incurred by Organisation A in relation to those ticket sales. It will therefore be necessary for Organisation A to apportion the event expenses between that amount that relates to mutual receipts and that amount that relates to assessable income.

The Commissioner accepts that a reasonable method of apportioning the expenses is by using the formula:

Non-member income × Apportionable expenses = allowable deduction

Total income