Edited version of private advice

Authorisation Number: 1052075431406

Date of advice: 10 January 2023

Ruling

Subject: Mutuality principles - assessable income

Question 1

Is the transfer fee paid by the assignor to the Body Corporate a mutual dealing?

Answer

No

Question 2

Is the transfer fee paid by the assignor to the Body Corporate assessable income?

Answer

Yes

This ruling applies for the following period

30 June 20XX

The scheme commences on

X July 20XX

Relevant facts and circumstances

You are a residential body corporate.

You first assigned management rights for the property under an agreement in 19XX.

Since then, the rights have had multiple assignments.

The assignor held management rights prior to July 20XX.

The assignor did not hold any lots on the property.

A Deed of Assignment was executed in July 20XX to assign the management rights from the assignor to the assignee.

A transfer fee was payable by the assignor to you for transferring the management rights within a two-year period.

A transfer fee of $X including GST was paid by the assignor to you in July 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Question 1

Summary

The mutuality principle is a legal principle established by case law. It is based on the proposition that an organisation cannot derive income from itself. The principle provides that 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.

The principle does not extend to include income that is derived from sources outside that group.

Detailed reasoning

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 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.

For the mutuality principle to apply the income must come from a member of the group, in this case the proprietors of the strata title property would be considered group members.

The assignor does not own any lot within the strata tile property. As such it is a non-member. The mutuality principle does not extend to dealings with non-members. Therefor the fee paid by assignor is not a mutual dealing.

Question 2

Summary

The money received meets the criteria of assessable income and therefore taxable.

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 $X received from the assignor was a fee due to leaving the contract in under two years. The fee would be considered income in the course of ordinary business dealings.

Revenue received from sources outside the organisation is considered assessable as the mutuality principle does not extend to outside sources.