ATO ID 2010/152: Wine Equalisation Tax: effect of principle of mutuality on sales by clubs and associations
Date of decision: 12 August 2010
Business line: Indirect Tax

Issue
In determining whether a club or association that supplies wine to its members in return for payment is making a 'sale' for the purposes of section 33-1 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act), is it relevant to consider the principle of mutuality?

Decision
No. The principle of mutuality is not relevant in determining whether a club or association that supplies wine to its members in return for payment is making a 'sale' for the purposes of section 33-1 of the WET Act.

Facts
A retailer sells wine to a club or association (the club). The club then provides the wine to its members and collects payment in accordance with an existing pricing schedule that was determined by the club. The retailer and the club are both registered for goods and services tax (GST) purposes.

Reasons for decision
Summary: Under Division 5 of the WET Act, liability for wine tax centres around the concept of an assessable dealing. An assessable dealing is defined in section 33-1 of the WET Act as any dealing covered by the Assessable Dealings Table (the Table), which is provided for under section 5-5 of the WET Act. The most common types of assessable dealing, as set out in items 1 & 2 of the Table, involve wholesale sales. Item 2 is particularly relevant to the facts set out above and covers a wholesale sale by an entity that is not the manufacturer of the wine. Section 33-1 of the WET Act provides that a wholesale sale is: ...a sale to an entity that purchases for the purpose of resale, but does not include a sale of wine from stock in a retail store (or retail section of a store) to make up for a temporary shortage of stock of the purchaser, if the wine is of a kind that: (a) is usually *manufactured by the purchaser; or (b) is usually purchased by the purchaser for resale. From the retailer's perspective, if their sales of wine to the Club are properly categorised as wholesale sales, item 2 of the Table will be applicable (Division 7 of the WET Act sets out a number of circumstances under which assessable dealings are exempt from wine tax. However, none of the circumstances are applicable in this instance). It is therefore relevant to consider whether the retailer is making a sale of wine to the club where the club has the purpose of on-selling the wine to its members, or whether the retailer is effectively making sales of wine to the club for consumption. If the former, then the sale by the retailer is a wholesale sale. If the latter, the sale is a retail sale. It is clear that the club has purchased the wine for the purpose of providing it to its members in return for payment as set out in a payment schedule determined by the club. It follows that if the provision of this wine by the club to its members can be considered a sale, then the sale of wine by the retailer to the club will constitute a wholesale sale. The WET Act provides little guidance as to the meaning of the term 'sale' in the context of the WET legislation. Section 33-1 of the WET Act provides that the term sale includes 'barter or exchange'. Paragraphs 92-96 of WETR 2009/1 discuss the meaning of the term 'sale' for the purposes of the WET Act. After considering the inclusive definition of sale in section 33-1, and the relevance of State and Territory sale of goods legislation, the Ruling concludes in paragraph 96 that: ...In broad terms, a sale of wine occurs for the purposes of the WET Act when ownership is transferred from one person (the seller) to another (the purchaser) for a 'price'. The Australian Oxford Dictionary , 2nd edn, 2004, Oxford University Press, Melbourne, similarly defines the term 'sale' as: 1 . the exchange of a commodity for money etc; an act or instance of selling... Therefore, it is clear that, to be a sale for the purposes of the WET Act, the provision of wine to a club or association member by the club or association must involve the transfer of ownership from one person (the club or association) to another (the individual member) for a price. The WET Act and the GST Act provide a number of express linkages in terms of definitions and concepts. For example, Assessable Dealing AD1b refers to a wholesale sale by an 'entity'. The term entity is defined in section 33-1 of the WET Act as having the meaning given in section 195-1 of the GST Act, which in turn relies on the meaning in Division 184 of the same Act. Section 184 of the GST Act distinguishes between 'individuals' and 'any other unincorporated association or body of persons'. The same distinction is therefore applicable for WET. Similarly, the term 'price', under the WET Act, is given the same meaning as section 9-75 of the GST Act, which provides: Price is the sum of: (a) so far as the *consideration for the supply is consideration expressed as an amount of *money-the amount (without any discount for the amount of GST (if any) payable on the supply); and (b) so far as the consideration is not consideration expressed as an amount of money-the *GST inclusive market value of that consideration. The term 'consideration' is defined in section 195-1 of the GST Act and refers to the application of section 9-15. Relevantly subsection 9-15(1) provides that consideration includes: Subsection 9-15(2B) of the GST Act expressly provides that payments made by a member of a body to that body will be 'consideration' for the purposes of that Act. For the avoidance of doubt, the fact that the supplier is an entity of which the *recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment, act or forbearance from being consideration . [Emphasis added] It follows that payments by a member of a body to that body for the supply of wine will constitute consideration, and therefore the price of the wine from a GST perspective. Given the reliance in the WET Act on the GST definition of price, it follows that payments by the member to the club for the wine constitute the 'price' of the wine for WET purposes. The other necessary element of a 'sale' is that there is a transfer of ownership in the relevant property. Where wine is made available by a club to its members for a price, the wine legally becomes the property of the member. Therefore this requirement is satisfied. A common law principle that can affect the taxation implications of dealings between a club and its members is the principle of mutuality. This principle recognises that receipts from transactions between a club and its members are not assessable income for the purposes of income tax legislation. The question arises as to whether the principle of mutuality can apply to the provision of wine by a club to its members and result in the supply of wine not being considered a sale (in the context of the WET Act). The principle of mutuality was discussed by the High Court in Bohemians Club v. Acting FCT (1918) 24 CLR 334 which provided: ...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 of himself... Taxation Determination 93/194 provides the following discussion on the application of the principle of mutuality in the context of income tax: 1. A licensed club is only assessable on trading income which relates to non-members and on income received from sources outside its general trading activities. This is due to the principle of mutuality that recognises that any surplus arising from contributions to a common fund created and controlled by people for a common purpose is not income. ( Bohemians Club v Acting FCT (1918) 24 CLR 334; Sydney Water Board Employees Credit Union v FCT (1973) 73 ATC 4129; (1973) 4 ATR 157; (1968) 18 TBRD Case T55 .) The principle of mutuality has been established in the context of income tax. There are fundamental differences however between the income tax legislation and the WET legislation. Income tax is concerned with an entity's assessable income in any given income year. The income tax approach necessitates a focus on the nature or character of a receipt to determine whether or not it forms part of an entity's assessable income for the relevant income year. In contrast to the income tax approach, the WET legislation is concerned with transactions (dealings) with wine, and it is the nature of a particular transaction (dealing) with the wine that determines whether or not it is subject to WET. The principle of mutuality does not deny the existence of transactions between a club and its members (for example a sale of goods to a club member), and similarly does not deny the existence of receipts arising from those transactions. It simply provides that the nature of the receipts arising from transactions between a club and its members means that they do not have the character of 'income' and do not form part of the club's assessable income. Therefore, the principle of mutuality cannot affect a transfer of ownership, for consideration, between two parties. As stated above, the principle of mutuality is only relevant to the determination of the character of a receipt arising from the relevant transaction (dealing); therefore it does not impact on whether there is a sale of wine by a club to its members. Given the meaning of the term 'sale' in the context of the WET Act involves the transfer of ownership of property for a price, and these elements are satisfied, the supply of wine from a club to its members in return for payment is a 'sale' for the purposes of section 33-1 of the WET Act (it follows that the retailer is making a wholesale sale of the wine to the club). The principle of mutuality does not affect this conclusion.

Legislative references: A New Tax System (Wine Equalisation Tax) Act 1999 Division 5 section 5-5 AD1a of the Table in section 5-5 AD1b of the Table in section 5-5 Division 7 section 33-1
Case references: Bohemians Club v Acting FCT (1918) 24 CLR 334
Related public rulings and determinations: WETR 2009/1 | TD 93/194
Other references: Australian Oxford Dictionary, 2nd edn, 2004, Oxford University Press, Melbourne
Subject references: Mutuality principle Wine equalisation tax