Edited version of private advice

Authorisation Number: 1052226950161

Date of advice: 1 March 2024

Ruling

Subject: Assessable income, principle of mutuality

Question 1

Are maintenance levies and late fees on those levies from members 'assessable income' of the Company as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Does the principle of mutuality apply to disregard any net capital gain the Company has from the sale of its interests in the property and business under section 102-5 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

In a particular income year

Relevant facts and circumstances

The Company was incorporated for the purposes of managing and governing the property. The Company is governed by its Articles of Association and Memorandum of Association.

The objects of the Company, as set out in its Memorandum of Association, include:

•         providing a community service and benefit for its members and their guests

•         ensuring that each of its members enjoy the use of the Company's vacation and recreational facilities

•         raising money from its members in accordance with the Articles of Association to meet its expenses and outgoings.

The Company owned some lots and the common areas of the property.

The other lots of the property were each divided into part-ownership shares (timeshares) that were sold to investors (timeshare owners).

Each timeshare provided a timeshare owner:

•         the right to occupy a lot for one week in every year to enjoy the property's amenities

•         a corresponding share in the Company; and

•         a proportionate ownership share in the title to the relevant lot.

The Company managed bookings to stay at the property. Bookings included stays at the property by non-members for a rental fee.

Timeshare owners could elect to place their entitlement to stay at the property into the property's rental pool. This entitled the timeshare owner to receive a portion of the net rental income derived by the Company from non-member bookings during the financial year. Timeshare owners that did not elect to enter the rental pool did not receive any such rental payment.

The Company was also a timeshare owner as it had, over time, acquired a number of shares from delinquent, deceased and disinterested timeshare owners.

Each year, the Company's committee determines the amount to be raised through annual membership levies from timeshare owners to cover the Company's outgoings (such as council rates, land tax, insurances, utilities, wages, etc.) and to maintain the building and amenities.

Each timeshare owner is required to pay their membership levy (the amount of which is based on the proportion of the timeshare owner's shares in the Company to the total number of issued shares) by the due date (as determined by the Company's committee). From time to time, timeshare owners may be required to pay an additional levy if the Company required additional funds to cover its outgoings.

Any amount of a timeshare owner's membership levy that is not paid by the due date will incur an interest charge and a late payment penalty (late fee). The late fee is at a rate determined by the Company's committee and is added to the amount of entitlement costs payable by the timeshare owner to the Company.

The membership levies are not refundable to timeshare owners unless the Company's committee determines otherwise.

The membership levies are kept in a sinking fund and term deposits that are separate to the Company's general administration fund which contained the Company's net rental income and used to fund the Company's business operations. The sinking fund and term deposits were kept for the maintenance of the property.

The Company is not a strata title body corporate as it is not a body corporate that was created on registration of the strata scheme under the relevant Act.

The Company is not permitted to pay dividends, bonuses or make any other payments to members (except payments to those who are employees or for reimbursements of costs).

Any surplus of funds from the payment of membership levies by timeshare owners or any interest earned from the investment of those levies is retained by the Company for the benefit of members.

Any surplus funds following the winding up or dissolution of the Company is to be paid or distributed amongst members equally in proportion to their shareholdings.

On DD Month 20XX, the Company and statutory trustees (on behalf of timeshare owners) sold the entire property and the business operated by the Company to an independent buyer.

Relevant legislative provisions

Section102-5 of theIncome Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Detailed reasoning

Subsection 995-1(1) defines 'assessable income' as having the meaning given by sections 6-5, 6-10 and 6-15.

Maintenance levies and late fees on those levies not ordinary income under section 6-5

Your assessable income includes income according to ordinary concepts, which is called 'ordinary income' (subsection 6-5(1)).

Whether or not a particular receipt is income depends on its character in the hands of the recipient(Scott v Federal Commissioner of Taxation [1966] HCA 48).

Although 'income' is not defined in the Income Tax Assessment Act 1936 nor the ITAA 1997, the courts have identified a number of factors that indicate whether an amount has the character of income according to ordinary concepts.

A receipt is not income where the 'principle of mutuality' applies. This is based on the premise that you cannot derive income from yourself. In Bohemians Club v Acting Federal Commissioner of Taxation [1918] HCA 16, Griffith CJ stated:

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.

Mutuality is limited in its application and each transaction needs to be examined to determine whether a particular dealing is mutual (as opposed to one of trade and producing a profit)(Revesby Credit Union Co-operative Limited and The Commissioner of Taxation for the Commonwealth of Australia [1965] HCA 2).

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 are income (Royal Automobile Club of Victoria (RACV) v Commissioner of Taxation of the Commonwealth of Australia [1973] VicSC 280, North Ryde RSL Community Club Limited v Federal Commissioner of Taxation [2002] FCAFC 74 and Fletcher v Income Tax Commissioner [1972] AC 414).

In addition, mutuality is dependent upon the existence of an 'identity' between contributors to a common fund and those who are entitled to participate in it and that, in one way or another, 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 (Coleambally Irrigation Mutual Co-operative Ltd v Commissioner of Taxation [2004] FCAFC 250).

Under the scheme, the timeshare owners, in accordance with the Company's Articles of Association, are required to pay their membership levies as determined by the Company's committee based on the amount of the Company's expected outgoings. Any late fee payable by a timeshare owner is at a rate determined by the Company's committee and is added to the amount of their entitlement costs payable by the timeshare owner to the Company.

Any surplus of funds from the payment of membership levies by timeshare owners are retained by the Company in a sinking fund and term deposits that are separate to the Company's other funds and reserved for the maintenance of the property.

Any surplus of funds following the winding up or dissolution of the Company is to be paid or distributed amongst timeshare owners in their capacity as shareholders in proportion to their shareholdings.

The principle of mutuality will apply to the maintenance levies and the late fees on those levies because:

•         the amounts are received by the Company within the operation of its Articles of Association that governs the mutual relationship between members such that it has the requisite link to the common fund

•         the membership levies represent a pre-estimate of the amount required to meet the timeshare owners' proportion of their mutual liabilities

•         the timeshare owners are dealing with the Company in their capacity as members, and

•         the timeshare owners are entitled to the recoupment or refund of any surplus of those amounts following the winding up or dissolution of the Company.

Therefore, the maintenance levies and late fees on those levies are not ordinary income of the Company under section 6-5.

Maintenance levies and late fees on those levies not statutory income under section 6-10

Your assessable income includes some amounts that are not ordinary income (subsection 6-10(1)). Such amounts are included in your assessable income by provisions about assessable income and are called 'statutory income' (subsection 6-10(2)). Section 10-5 contains a list of provisions that include in your assessable income amounts that are statutory income.

None of the provisions listed in section 10-5 apply to the maintenance levies and late fees on those levies.

Accordingly, the maintenance levies and late fees on those levies are not statutory income of the Company under section 6-10.

Conclusion

Subsection 6-15(1) states that if an amount is not ordinary income, and is not statutory income, it is not assessable income.

As the maintenance fees and late fees on those levies from timeshare owners are neither ordinary income under section 6-5 nor statutory income under section 6-10, they are not assessable income of the Company as defined in subsection 995-1(1).

Question 2

Detailed reasoning

As explained in the reasoning for Question 1, the principle of mutuality is a relevant consideration in determining whether an amount is 'income' according to ordinary concepts.

The principle of mutuality does not apply to the extent the Company makes a genuine gain and to dealings between the Company and non-members.

Notwithstanding this, subsection 6-10(1) provides that your assessable income also includes some amounts that are not ordinary income. This includes your net capital gain for the income year under section 102-5.

CGT event A1 happened when the Company disposed of its interest in the property and its business (subsection 104-10(1)). Accordingly, the Company will need to include any capital gain or capital loss it made on the disposal in working out its net capital gain for the income year.

Accordingly, the principle of mutuality does not apply to disregard any net capital gain the Company has made from the sale of the property and its business.