Private ruling: Mutuality of Income and Car Parking Fringe Benefit Exemption
Date of advice: 21 April 2017
Published: October 2017
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the principle of mutuality apply to exclude from the organisations assessable income, mutual receipts it receives from dealings with its members pursuant to section 59-35 of the Income Tax Assessment Act 1997 (ITAA 1997 ) ? | A1: Yes. In part.

Relevant facts and circumstances: The organisation is a not-for-profit association incorporated under a certain Act. The organisation was established in the early 1900’s and is a member-owned organisation representing a certain industry. A copy of the organisation’s articles has been provided to enable the correct determination of the question. The articles of Entity X include the following: ● The Objects of the organisation; ● Powers of the organisation in carrying out its objects; ● Membership categories and the difference between each membership ● Members A ● Members B ● Members C ● Members D ● Members E ● Members F ● Persons responsible in administering the organisation, their roles and abilities; ● Voting procedures and rights; ● Only members A and D can vote ● The organisations Dissolution clause stating that no surplus will be distributed to members. The organisation provides services to their members and non-members and derives income from both. The organisation has adopted a method in calculating both mutual and non-mutual receipts. As a mutual organisation, the organisation restricts the majority of its services and benefits to its members. The organisation reinvests its profits back into its members and service offerings. Members A must be holding an underlying Members C membership. Other than for voting rights, members generally have the same entitlements regardless of membership class. The interests of all member classes are represented by elected 'Members A’ membership holders. The structure of the organisation is such that there is a correlation between 'Members A’ and other membership classes. Members E have restricted access to the organisations services. Members F have no access to services. Every Member of category A and D are entitled to vote at general meetings. The organisation provides car parking bays to employees on site. The cars provided to the employees are not parked at a commercial parking station. The organisation is not a public company or a subsidiary of a public company. The organisation is not a government body. The organisation is not a small business entity. The organisation’s ordinary and statutory income is less than $10 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 59-35 | Fringe Benefits Tax Assessment Act 1986 section 58GA | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Summary: The receipts of fees received by the organisation from some members are not subject to the principle of mutuality. All the elements for mutuality to apply have not been met for all members. It is accepted that all members have contributed to a common fund for a common purpose. However, the fund is managed and controlled only by those members who have Voting rights. Receipts from members who have Voting rights will be considered as mutual receipts. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income. Whether a receipt is income depends upon its quality in the hands of the recipient. Section 6-10 of the ITAA 1997 provides that assessable income also includes statutory income (amounts included by provisions about assessable income). The term 'income’ is not defined in the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. In The Bohemians Club v. The Acting Federal Commissioner of Taxation [1918] 24 CLR 334 ( Bohemians Club ), Griffith CJ stated at 337-338: 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. The above comments of Griffith CJ have formed the basis of the 'principle of mutuality’ as it applies in Australia. As such, a receipt by a taxpayer will not have the quality of ordinary income if the mutuality principle applies to it. 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. A number of authorities have established the application of the mutuality principle in Australia. They include Bohemians Club , 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 ( Sydney Water Board ), 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 ). Therefore, the essence of the mutuality principle is that you cannot derive any gain (and thus income) from dealings with yourself. Where a number of people associate 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 purpose is not income or profit. As such, a mutual association has all of the following characteristics: ● A common purpose: 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 to a common fund: 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. ● Control of the common fund by the contributors: complete identity as a class between the contributors and the participators. All contributors to the common fund must be entitled to participate in any surplus and all participators in the surplus must be contributors to the common fund. 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. Where these conditions are met, any return of surplus to the contributors is treated as a return of their own moneys and not as income. Also, contributions by the members into the common fund (mutual receipts) are not treated as income of the association. The expression 'mutual association’ is often applied to such an association as a term of convenience but the application of the principle of mutuality relies on the nature of the particular transaction rather than the presence of such an association: Fletcher v. Income Tax Commissioner (Jamaica) [1971] 3 All ER 1185 ( Fletcher ) . Supplementary to the general principle, the authorities have also established that: ● A mutual association may engage in business dealings with outsiders in addition to its mutual dealings with members. Receipts from such business dealings are severable from mutual receipts from members and will give rise to income. The excess generated from such dealings with non-members will be severable and assessable to the mutual concern. ● Contractual payments or subscriptions paid by individual members which afford them benefits individually are not contributions to a common fund: for example, the Sydney Water Board case (interest payments to discharge legal obligations under individual contracts of loan). ● The return of surplus to the contributors need not occur on an annual basis, nor must it be returned in any particular form. All that is required is that it be returned 'sooner or later, in meal or in malt' : see Jones v. The South-West Lancashire Coal Owners' Association Ltd (1927) 11 TC 790 at 832, per Viscount Cave. Therefore, the application of contributions/surplus to build up reserves may not displace the presence of mutuality. The incorporation of an association will not of itself affect the operation of the mutuality principle, provided that the company has been incorporated as a mere convenient agent or instrument of the members. However, mutuality will not apply if the corporation has its own independent existence separate from its members. A company can make assessable profits from trading exclusively with its own members. ● If the true nature of the transactions/dealings of the association amounts to the carrying on of a trading operation for profit, the mutuality principle will not apply: see the Fletcher case. ● Entity X’s circumstances (as per the facts provided) are discussed in detail below in respect of each of the common characteristics of a mutual association. | Detailed Reasoning - Common Purpose: A mutual dealing is found where a number of persons associate together for a common purpose. The dealings do not give rise to a profit, the people join together not for trade or profit but to achieve a common end or benefit in which all members participate or are entitled to do so. In Music Traders, the Full Federal Court considered whether fees paid by members of an association to a third party in return for exhibition space at a trade fair, which were then on-paid to the association constituted contributions to a common fund by the members and thus subject to the principle of mutuality, or whether they were in the nature of profit derived in the course of trading. The Australian Music Traders Association was established for the promotion of the interests of people engaged in dealing in musical instruments, records and associated equipment; and the conduct of music trade fairs for the exhibition of goods dealt in by members and others. In the relevant income year, the Association engaged a third party company to organise a trade fair on its behalf. The company sold exhibition space to traders, some of whom were members of the association. Each trader that took exhibition space entered into a written agreement which set out the cost and size of the floor space to be taken. The agreement between the Association and the trade fair organiser entitled the Association to receive out of monies paid by member traders, an amount determined in accordance with a formula relating to floor space occupied. The court was required to determine if the resulting sum payable to the Association was to be characterised as income, or whether it was subject to the principle of mutuality, and thus not income. The majority found that the receipts were not subject to the mutuality principle. Davies J, who was a member of the majority, quoted from the judgment of Lord Wilberforce in Fletcher at 1189 in posing the question to be answered: 'is the activity, on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or is it, on the other, a mutual arrangement which, at most, gives rise to a surplus?’. Davies J concluded that the activity and the fee received in connection with the activity were not mutual in nature. He said at 4538-39: The fee paid by the organisers of the fair to the Association was not a fee payable by members of the Association into a common fund. And the fair, though it benefited members of the association, was not a mutual, non-profit activity. Its essence was that of trading for profit by individual traders, though through the medium of a common activity, the fair. The organisation is a member-owned, not-for-profit association which was incorporated under the Associations Incorporation Act 1987 . Its members have associated together for a common purpose, being (amongst other things) to ensure its members enjoy a high reputation in a certain industry and to operate in a sustainable business environment. The organisation also offers different levels of membership as outlined in the facts. Members pay a fee based on the class of membership they have which demonstrates a relationship between services provided by the organisation and the level of membership paid for those services. | Detailed Reasoning - Contributions to a common fund for a common purpose: For the principle of mutuality to apply, there must be a common fund. It can be described as a fund established by contributors for a common purpose in which contributing members as a class have rights. The fund must be owned or controlled wholly by the contributors. If it is owned and controlled by anyone else, the principle cannot apply. In New York Life Insurance Company v. Styles (1889) 14 App Cas 83 ( Styles ), Lord Herschel (at 209) referred to the following situation which illustrates the operation of a common fund: The members contribute for a common object to a fund which is their common property; it turns out that they have contributed more than is needed, and therefore more than ought to have been contributed by them, for this object, and accordingly their next contribution is reduced by an amount equal to their proportion of excess. The decision in Music Traders emphasised the importance of determining the purpose of the members making the payments in ascertaining whether those payments are to be characterised as contributions to a common fund. The exhibition fees paid by members participating in the trade fair were to secure individual exhibition space. The court held there was no common purpose, concluding at 4538-39 that the music fair in: …essence was that of trading for profit by individual traders, though through the medium of a common activity, the fair. In the Sydney Water Board case, the taxpayer unsuccessfully argued that interest paid by borrowing members of the credit union constituted a common fund paid for the common purpose of enabling the credit union to meet its administrative and operating expenses, with any surplus refundable to borrower members. Interest paid was not maintained as a common fund in which the borrowing members as a class had any rights. Interest was paid by borrowers in discharge of their legal obligations and became part of the general funds of the credit union. It was not paid as a contribution to the mutual liabilities on behalf of the borrowers. Mason J. noted at 4136 that the borrowing members did not have any right to a refund of part of the interest which they have paid; on the contrary: …the interest so paid forms part of the funds of the taxpayer… the borrowing members are entitled to participate in a distribution of the surplus which results from the taxpayer’s use of the general funds. The existence of a common fund is premised on the existence of identity between what a member of the fund contributes to the fund and the benefit they stand to receive from the fund. Sydney Water Board illustrates the principle that where a member deals with an association as a customer they are not contributing to a common fund, rather they are contracting on an individual basis with the provider of a service on their own account. The organisation is not-for-profit organisation whose members make contributions for the common purpose of providing an effective method of assisting in the delivery of services provided by the industry that the organisation is based on. None of the objectives involve trade or profit. All objectives aim to achieve a common benefit in which all members participate. All income and property derived or held by the organisation must be applied solely towards the objects of the company . The organisation provides services to its members and non-members. All members are required to pay all fees and charges due to the organisation. Other than for voting rights, members generally have the same entitlements regardless of the membership class (with some exceptions for Members E and Members F). | Detailed Reasoning - Control of the common fund by contributors: It has been established that, for the principle of mutuality to apply, there must be a common fund. Expanding from that, it is essential that the fund must be owned or controlled wholly by the contributors. If it is owned and controlled by anyone else, the principle will not apply. It holds then that a relationship must exist between the fees contributed by a member and the rights and entitlements they have to the common fund. There must be a connection between what the member contributes and what the member may be expected or entitled to receive from the fund. All contributors to the common fund must be entitled to participate in any surplus and all participators in the surplus must be contributors to the common fund. The principle of mutuality is dependent upon the existence of an 'identity’ between contributors to the fund and those who are entitled to participate in it. It is essential 'that at any given moment of time the persons who are contributing must be identical with the persons who are entitled to participate’ ( Faulconbridge v. National Employers’ Mutual General Insurance Association Ltd (1952) 33 T.C. 103, at 125). The mutuality principle may be displaced where there is a difference of identity between those who contribute and those who can receive a distribution of surplus, or where the distribution of surplus is disproportionate to the amount contributed. 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 contributed to the common fund and those who participated in the common fund is broken so as to prevent the principle of mutuality from applying (at 4842-4843): For the mutuality principle to apply, in one way or another (“in meal or malt”) 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…. CIMCL’s constitution is such that once the contributions are made, the monies contributed can no longer be said to “belong” to the members, either in a formal or a substantive sense. The contributions may only be applied in the manner specified… whilst CIMCL is a going concern, and may not be distributed amongst CIMCL’s members on winding up. The mutuality principle requires there to be a pooling of funds which can only be expended in pursuit of the common purpose, or returned to the contributors… Rules 71 and 75 of CIMCL’s constitution are such that the sinking fund does not satisfy this description. In response to the decision in Coleambally , section 59-35 of the ITAA 1997 was enacted to ensure that contributions from members to an entity (common fund) would continue to be treated as mutual, where the constituent document of the entity prevents the distribution of money or property to its members. Section 59-35 of the ITAA 1997 operates to treat what would be a mutual receipt, as non-assessable, non-exempt income. No provision in the ITAA 1936 or the ITAA1997 operates to treat mutual receipts as assessable income. Section 59-35 of the ITAA 1997 can operate to prevent the member receipts as being treated as assessable income and will cause the member receipts to be treated as mutual receipts. The organisation has six types of membership. Not all members are allowed to vote which means that not all members have control of the fund. A clause in the articles provides the group name of the persons who have the power to manage the affairs of the organisation. The group comprises certain number of members and are either 'Members A’ or 'Members D’ of the organisation. Another clause in the articles explains the group who manages the affairs of the organisation also has the power to appoint or dismiss a Chief Executive Officer and to prescribe Codes and Rules, so long as those codes and rules are not inconsistent with the organisations articles. A clause in the articles states that all members in the 'Members A’ and 'Members D’ class are entitled to vote. Certain section in the articles show the organisations winding up clause which does not allow distributions to be made to members, and is dependent upon the determination by Voting members as to how the surplus will be distributed. Therefore, only the Voting members are able to control the common fund, and only the Voting members have the right to determine the distribution of the surplus. Voting members of the organisation are 'Members A’ and 'Members D’. A clause in the articles along with the information provided in regards to Membership Classes explains that all 'Members A’ must have an underlying 'Members B’ membership. According to the Article, all 'Members A’ must hold an underlying 'Members B’ membership but it is possible for 'Members B’ to not be represented by 'Members A’. As all 'Members A’ hold an underlying 'Members B’ membership, 'Members B’ would have voting rights provided that they are represented by a 'Members A’. Therefore, 'Members B’ will be considered as Voting members provided that they are represented by at least one 'Member A’. These factors show that while all members contribute to the fund, Members C, E and F do not exercise any control over the fund. As such a common fund, consisting of only the contributions of Voting members, can be owned and controlled by the contributors being the Voting members. The contributions by non-voting members do not form part of the common fund. All members do not have the same rights to participate in the benefits of a membership. Non-voting members do not have an entitlement to vote nor do they have any entitlement to distributions from a surplus. | Detailed Reasoning - Conclusion: The principle of mutuality does not apply to receipts from non-voting members because: ● these members have no control of their funds once they are contributed to the organisation; and ● there is no identity between these members as contributors and as participants in any surplus. However we accept the receipts from Voting members are mutual dealings since all the following elements of mutuality are present: ● there is a common fund, consisting of contributions by Members A and D only, for a common purpose; ● the common fund consisting of contributions from Voting members is owned and controlled by Voting members; and ● there is a reasonable identity between Voting members as contributors and Voting Members as participants to the fund as section 59-35 of the ITAA 1997 operates to include these receipts as mutual receipts even though the constituent document prevents the distribution of any surplus to members. | Summary: The car parking benefits provided by the organisation will be exempt under section 58GA of the FBTAA provided that apportioned income from non-member receipts and receipts from non-voting members does not exceed $10 million. | Detailed Reasoning - Detailed reasoning: Section 58GA of the FBTAA provides the following: (1) A car parking benefit provided in an FBT year in respect of the employment of an employee is an exempt benefit if: (a) the car is not parked at a commercial parking station; and (b) the employer of the employee is not a public company (see subsection (3)), in relation to the day on which the benefit is provided; and (c) the employer is not a government body; and (d) either: (i) the sum of the employer’s ordinary income and statutory income for the year of income ending most recently before the start of the FBT year is less than $10 million; or (ii) the employer is a small business entity for the year of income ending most recently before the start of the FBT year. Based on the facts provided, the conditions at paragraphs 58GA(1)(a), (b) and (c) are satisfied, and subparagraph 58GA(1)(d)(ii) does not apply as REIWA is not a small business entity. Therefore, it is necessary to determine whether subparagraph 58GA(1)(d)(i) is satisfied. Subparagraph 58GA(1)(d)(i) of the FBTAA specifies that the employer's ordinary and statutory income for the income tax year ending most recently before the start of the FBT year must be less than $10 million. Subsections 58GA(3) and 136(1) of the FBTAA defines 'ordinary income' and 'statutory income' to have the same meaning as in the Income Tax Assessment Act 1997 (ITAA 1997). 'Ordinary income' has the meaning given in subsection 6-5(1) of the ITAA 1997. 'Statutory income' has the meaning given in subsection 6-10(2) of the ITAA 1997. Ordinary and statutory income includes exempt income (subsection 6-1(2) of the ITAA 1997). As per the response to Question 1, section 59-35 of the ITAA 1997 operates to treat what would be a mutual receipt, as non-assessable, non-exempt income. No provision in the ITAA 1936 or the ITAA 1997 operates to treat mutual receipts as assessable income. It therefore follows that mutual receipts will not be included when calculating the $10 million threshold for the purposes of section 58GA of the FBTAA. The organisation’s ordinary and statutory income is less than $10 million. As all of the conditions specified in section 58GA of the FBTAA are satisfied, the car parking benefits provided are therefore exempt.

Question 2: Would the total amount of mutual receipts received by the organisation be excluded from calculating the $10 million threshold for the purpose of determining the small business car parking exemption under section 58GA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | This ruling applies for the following periods: FBT year ended 31 March 2015 | FBT year ended 31 March 2016 | FBT year ending 31 March 2017 | FBT year ending 31 March 2018 | FBT year ending 31 March 2019 | FBT year ending 31 March 2020