Edited version of private advice

Authorisation Number: 1051797168665

Date of advice: 15 January 2021

Ruling

Subject: Mutuality and taxable income

Question 1

Are the annual subscription fees derived from members of X Ltd non-assessable non-exempt income under section 6-23 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will fees paid by members of X Ltd for attending X Ltd workshops and forums be non-assessable non-exempt income to X Ltd under section 6-23 of the ITAA 1997?

Answer

Yes

Question 3

Will fees paid by entities that are not members of X Ltd for attending X Ltd workshops and forums be non-assessable non-exempt income to X Ltd under section 6-23 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX to year ending 30 June 20XX

The scheme commences on:

19 March 20XX

Relevant facts and circumstances

X Ltd is a public company limited by guarantee. It is governed by the rules in its constitution.

X Ltd's constitution provides:

•         that it is a not for profit company limited by guarantee and does not have share capital.

•         That it is established to be, and to continue as, a charity.

•         On the winding up of the company, surplus assets of the company are not to be distributed to members and must instead be distributed to other charities.

•         The income and property of the Company will only be applied towards the promotion of the objects of the Company, which are the pursuit of certain charitable purposes.

X Ltd is not registered under the Australian Charities and Not-for profits Commission Act 2012.

X Ltd employs consultants to assist with their day-to-day operations and X Ltd's specific initiatives.

In the 2020-2021 income year, X Ltd will host forums, workshops and 2 major annual conferences relating to, and in the advancement of, its objectives.

X Ltd will receive its income from various sources (members' subscriptions and contributions, and government grants). Each source is outlined below.

Government Grants

X Ltd has been provided government funding for the pursuit of its objectives and will continue to seek government assistance.

Fees for attendance at X Ltd workshops

The costs of operating X Ltd workshops are covered by government funding, and X Ltd does not currently prescribe a fee or any other consideration for attendance by members and non-members, but may do so in the future.

Member Income

X Ltd's member income is derived from their members' annual subscription.

These funds are used to remunerate 2 individuals engaged by the company for the provision of particular services: a consultant General Manager and an Editor.

The funds are also appropriated to cover some office costs such as maintenance, stationery, and local travel.

Reasons for decision

Question 1

Summary

The annual subscription fees derived from members of X Ltd are non-assessable non-exempt income under section 6-23 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Charity and Income Tax Exemption Status

Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of the entities covered in the tables in Subdivision 50-A is exempt from income tax. These entities are able to self-assess their income tax exempt status.

Section 50-47 of the ITAA 1997 provides special conditions for all items in Subdivision 50-A:

"An entity that:

(a)  is covered by any item; and

(b)  is an ACNC type of entity;

is not exempt from income tax unless the entity is registered under the Australian Charities and Not for profits Commission Act 2012".

Section 995-1 of the ITAA 1997 refers to Column 1 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act) for the meaning of 'ACNC type of entity'.

The entity referred to in Column 1 of the table in subsection 25-5(5) of the ACNC Act is described as a 'charity'.

Section 5 of the Charities Act 2013 (CA) in turn defines 'charity' as follows:

'''charity' means an entity:

(a) that is a not-for-profit entity; and

(b) all of the purposes of which are:

(i) charitable purposes that are for the public benefit; or

(ii) purposes that are incidental or ancillary to, and in furtherance or in aid of, purposes of the entity covered by subparagraph (i); and

(c) none of the purposes of which are disqualifying purposes; and

(d) that is not an individual, a political party or a government entity.''

Subsection 12(1) of the CA provides the following meaning of 'charitable purpose':

'''charitable purpose' means any of the following:

(a) the purpose of advancing health;

(b) the purpose of advancing education

(c) the purpose of advancing social or public welfare...''

X Ltd's constitution provides that it is a not for profit company and a charity. It is also required to distribute its surplus on winding up to a charitable not-for-profit entity. Its object is broadly the pursuit of various charitable purposes.

None of the purposes of X Ltd are disqualifying purposes under section 11 of the CA; nor is X Ltd an individual, political party or government entity.

On this basis X Ltd would fall within the scope of an "ACNC type of entity''.

However section 50-47 requires that an ACNC type of entity be registered as a charity with the ACNC to be exempt from income tax. As X Ltd is not so registered, it is not exempt from income tax.

Principle of Mutuality

Section 59-35 provides as follows:

''An amount of ^*ordinary income of an entity is not assessable income and not ^*exempt income if:

(a) the amount would be a mutual receipt, but for:

(i) the entity's constituent document preventing the entity from making any ^* distribution, whether in money, property or otherwise, to its members; or

(ii) the entity ' s constituent document providing for the entity to issue MCIs (within the meaning of the Corporations Act 2001) or to pay ^* dividends in respect of MCIs; or

(iii) the entity having issued one or more MCIs (within the meaning of the Corporations Act 2001) or having paid dividends in respect of one or more MCIs; and

(b) apart from this section, the amount would be assessable income only because of section 6-5..''

The mutuality principle is based on the proposition that an organisation cannot derive income from itself. Where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income.

Where members of an organisation are found to be dealing with each other on a mutual basis, member contributions to the mutual concern are not treated as ordinary income of the entity undertaking the group's activities.

The characteristics of organisations that can access mutuality are summarised in the Commissioner's general guidance 'Mutuality and taxable income' and typically include the following:

•         The organisation is carried on for the benefit of its members collectively, not individually.

•         The members of the organisation share a common purpose in which they all participate or are entitled to do so.

•         The main purpose for which the organisation was established, and is operated, is the common purpose of the members.

•         There is a common fund that gives effect to the common purpose and all the members contribute to it.

•         All the contributions to the common fund are applied for the collective benefit of all the members, in line with the common purpose.

•         Different classes of memberships may exist with varying subscription rates, rights and entitlements to facilities.

•         The members have ownership and control of the common fund.

•         The contributors to the common fund must be entitled to participate in any surplus of the common fund. This general rule is modified by section 59-35, above: if an organisation's constituent document prevents it from making any distribution to its members, and this is the only thing that prevents an amount of its income from being a mutual receipt, the organisation is not prevented from accessing mutuality for income tax purposes.

With regard to the indicia specified above, it is accepted in this case that:

•         X Ltd exists for the benefit of its members collectively, not individually.

•         Its members share the common purpose reflected in the company's objects.

•         The main purpose for which X Ltd was established is for the pursuit of various charitable objectives, as articulated in its constitution.

•         All members contribute to the "common fund" in the form of subscription fees, which are applied to the company's objects and for the common benefit of the members.

While the members are not entitled to participate in the surplus of the fund, section 59-35 states that an amount that would, but for 'the entity's constituent document preventing the entity from making any distribution...to its members' would be a mutual receipt and which, apart from section 59-35, 'would be assessable income only because of section 6-5' is not assessable income and not exempt income. It is considered that, if not for the application of section 59-35, the subscription fees received by X Ltd would not be a mutual receipt (in light of the prohibition in its constitution preventing distribution to its members), and would consequently have fallen within the ambit of section 6-5 as ordinary income.

As such, the amounts derived from members by way of member's annual subscription fees fall within the scope of section 59-35 and, as a consequence, are non-assessable non-exempt income under section 6-23 of the ITAA 1997.

Question 2

Summary

Fees paid by members of X Ltd for attending X Ltd workshops and forums will be non-assessable non-exempt income to X Ltd under section 6-23 of the ITAA 1997

Detailed reasoning

At present, X Ltd does not prescribe a fee or any other consideration for attendance by members and non-members at workshops and forums it organises. The expenses incurred in conducting these events are met by government funding.

The events are attended by various government agencies, which are responsible for covering their own costs in travel and accommodation.

However, in the event that X Ltd should impose a fee for attendance by members for any such future event, the issue arises as to whether it will be non-assessable non-exempt income in the hands of X Ltd.

For the same reasons as expressed in respect of question 1, these amounts will fall within the scope of section 59-35. Specifically:

•         As per the mutuality principle, where a number of persons contribute to a common fund created and controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income.

•         Where members of an organisation are found to be dealing with each other on a mutual basis, member contributions to the mutual concern are not treated as ordinary income of the entity undertaking the group's activities.

•         In this regard, contributions by members to the common fund by way of fees paid to X Ltd for attendance at its events will be applied for the collective benefit of all the members, in line with X Ltd's common purpose.

•         Notwithstanding the prevention against distribution to members under X Ltd's constitution, section 59-35 will apply to treat such amounts as not assessable income and not exempt income, for the following reasons:

-        they would otherwise be considered mutual receipts; and

-        if not for the application of section 59-35, they would have fallen within the ambit of section 6-5 as ordinary income.

As such, any amounts derived from members by way of fees for attendance at X Ltd events will fall within the scope of section 59-35 and, as a consequence, will be non-assessable non-exempt income under section 6-23 of the ITAA 1997.

Question 3

Summary

Fees paid by entities that are not members of X Ltd for attending X Ltd workshops and forums will not be non-assessable non-exempt income to X Ltd under section 6-23 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 brings ordinary income within the scope of assessable income.

It is generally recognised that income generated from activities conducted by an entity is assessable as ordinary income. Where fees or other amounts are paid by non-members to X Ltd for attending workshops and forums conducted by X Ltd, such amounts are assessable as, broadly speaking, 'ordinary income' derived from services rendered by the company.

While the mutuality principle (aided by section 59-35 in this case) would apply to deem the receipt of such amounts from members not to be assessable, the principle does not extend to amounts received from non-members. Accordingly, such amounts will be assessable income under section 6-5: see Royal Automobile Club of Victoria v FCT (1973) 4 ATR 567.

At present X Ltd does not currently prescribe a fee or any other consideration for attendance at workshops or forums. However, in the event that any such fee is prescribed, receipt of such amounts will be assessable as ordinary income to the extent that it is received from a non-member, and will not be non-assessable non-exempt income to X Ltd under section 6-23 of the ITAA 1997.