Private ruling: Income tax - assessable income - mutual receipts
Date of advice: 10 December 2015
Published: February 2016
Ruling period: 1 July 2013 to 30 June 2017

Ruling: Q1: Does the principle of mutuality apply to the members' dues and subscription fees received by a company limited by guarantee ('the company') from its members? | A1: Yes | Q2: Does the principle of mutuality apply to income generated by the company from the sale of goods and services to its members, as specified in the facts? | A2: Yes | Q3: Does the principle of mutuality apply to interest received on term deposits held by the company? | A3: No | Q4: Does the principle of mutuality apply to commissions received by the company from suppliers and to income derived from the Partnership Program and advertising revenue? | A4: No

Relevant facts and circumstances: The company is a company limited by guarantee. The company was established to provide social and recreational activities to its members. The company is non-profit. The company receives income from member's subscriptions, sale of goods and services to its members, bank interest and commissions. The company does not provide any goods or services to non-members.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: The principle of mutuality applies to the subscription fees received by the company from its members. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income. The principles and tests for ascertaining whether a receipt is income according to ordinary concepts have been laid down by the courts over the years. One of these principles is the principle of mutuality. The principle of mutuality is based on the proposition that a taxpayer cannot derive income from itself. Under that principle receipts derived by a taxpayer from mutual dealings with its members are not assessable income. Such receipts are called mutual receipts. Mutual receipts may include member subscriptions. The principle was established in New York Life Insurance Company v. Styles (1889) 14 App. Cas. 381. There the sole members of a life insurance company were participating policy holders each of whom was entitled to a share of the assets and liable to all losses. The surplus on premiums paid by policy holders were returned annually to them as bonuses or by way of reduction of future premiums. Any balance was carried forward and held for the benefit of the general body of members. The ratio of the decision was expressed in the following passage taken from the speech of Lord Watson (at p. 394): ``When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities, or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive... why contributions returned to them should be regarded as profits.... a member of the appellant company, when he pays a premium, makes a rateable contribution to a common fund, in which he and his co-partners are jointly interested, and which is divisible among them.... He pays according to an estimate of the amount which will be required for the common benefit; if his contribution proves to be insufficient he must make good the deficiency; if it exceeds what is ultimately found to be requisite, the excess is returned to him.'' A mutual association has all of the following characteristics: • 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 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 (however under section 59-35 of the ITAA 1997 an amount of ordinary income is non-assessable non-exempt income where the only thing preventing it from being a mutual receipt is a prohibition on actual distribution to the members); • complete identity as a class between the contributors and the participators; and • a reasonable relationship between what a member contributes and what the member may be expected or entitled to receive in respect of the common fund. However not all member contributions are mutual dealings; see FC of T v. Australian Music Traders Association 90 ATC 4536. The company is carried on for the benefit of its members by way of the services it provides. The members share a common purpose, a purpose for which the organisations was established. All members contribute an annual subscription fee and it is accepted that there exists a reasonable relationship between what the member contributes and the services provided. There is one class of membership and the members have ownership and control. The subscription fees received by the company from its members are not ordinary income by virtue of the principle of mutuality. | Detailed Reasoning - Question 2: Does the principle of mutuality apply to income generated by the company from the sale of goods and services to its members? | Summary: The principle of mutuality applies to income generated by the company from the sale of goods and services to its members. | Detailed Reasoning - Detailed reasoning: There are exceptions to the mutuality principle and some receipts from members may constitute income for the purpose of the ITAA 1997. The principle will not apply to activities that are considered in the nature of trade as opposed to a mutual activity. Nor will it apply where there is a distinct disparity between the contributors and the recipients of the organisation. The fact an association may be considered a mutual organisation for the purposes of the mutuality principle, and most of its income may be considered mutual in nature, will not prevent some of this income being excluded from the principle and assessed under ordinary concept of income. A dealing between members is not conclusive of a mutual transaction. This exception was best explained by Lord MacMillan in the case Inland Revenue Commissioners v. Ayrshire Employers Mutual Insurance Association Ltd (1946) 1 All ER 637 at 640 when he said that: "It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions." In the present case the income which the company derives from the sale of goods and services are to its members only. The purpose for which the company was established is to conduct and promote recreational activities amongst members. The company is owned and controlled by members and exists to benefit its members. The sale of discounted goods and services are in keeping with this purpose. The company transacts with its members collectively to produce a surplus of common funds. It is considered that income received from the sale of goods and services to members is a mutual arrangement and the principle of mutuality will apply to this income. | Detailed Reasoning - Question 3: Does the principle of mutuality apply to interest received on term deposits held by the company? | Summary: Interest from bank deposits is income from non-mutual sources and is therefore assessable income for tax purposes | Detailed Reasoning - Detailed reasoning: The principle of mutuality does not extend to include income that is derived from sources outside the group. As discussed in Taxation Ruling TR 2015/3, interest and dividends from invested funds was held to be from non-mutual sources and therefore assessable income for tax purposes. Therefore interest received on bank deposits held by the company is a non-mutual receipts and therefore assessable income for tax purposes. | Detailed Reasoning - Question 4: Does the principle of mutuality apply to commissions received by the company for purchases its members make via a third party? | Summary: The principle of mutuality does not apply to commissions received by the company for purchases its members make via a third party. | Detailed Reasoning - Detailed reasoning: The principle of mutuality only applies to the dealings of contributors to a common fund. The common law is well developed in this regard; see Carlisle and Silloth Golf Club v. Smith - [1912] 2 KB 177; Coleambally Irrigation Mutual Co-Operative Ltd v Commissioner of Taxation [2004] FCAFC 250 (7 September 2004). In addition, commissions received by organisation have been previously examined by the courts. In Royal Automobile Club of Victoria (R.A.C.V) v. Federal Commissioner of Taxation (1973) 4 ATR 567 (RACV), on appeal, Anderson J examined a number of activities carried out by the appellant to decide for which of its activities the principle of mutuality applied. One such activity was a touring department from which members were able to obtain information concerning road and touring conditions as well as books which provided detailed information about hotel, motel and other accommodation. His honour said in regard to the commissions received by RACV at 588: The touring department earned no revenue. The principle of mutuality obviously applied to it. If any commissions were received by the appellant from hotels or other establishments such commissions would, I consider, be assessable income as they would be received pursuant to commercial contracts with the hotels or other establishments, and such contracts would be trading activities. If the cost to the appellant involved in a member or members of its staff recommending accommodation and such recommendation earned a commission, then pro tanto , the cost involved would be an allowable deduction. The company derives commission revenue from the sale of goods and service to its members from a third party. The transaction is conducted outside of the company and via the third party. This activity is sufficiently similar to that referred to in the RACV case above and therefore this activity is considered a trading activity and the principle of mutuality does not apply to the receipt of fee/commissions.

Question 1: Does the principle of mutuality apply to the subscription fees received by the company from its members?