Private ruling: Income Tax Issues; Mutuality Principle
Date of advice: 21 February 2017
Published: July 2017
Ruling period: Income year ended 30 June 2017 | Income year ended 30 June 2018 | Income year ended 30 June 2019 | Income year ended 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Are member contributions paid to the Entity for their annual membership fees assessable income under: (i) section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or (ii) section 6-10 of the ITAA 1997? | A1: No | Q2: Are the amounts that the Entity's members pay to attend workshops organised by the Entity assessable income under: (i) section 6-5 of the ITAA 1997 or (ii) section 6-10 of the ITAA 1997? | A2: No | Q3: Are the amounts that the Entity's non-members pay to attend workshops organised by the Entity assessable income under: (i) section 6-5 of the ITAA 1997 or (ii) section 6-10 of the ITAA 1997? | A3: Yes | Q4: Are receipts from sponsors of the Entity assessable income under: (i) section 6-5 of the ITAA 1997 or (ii) section 6-10 of the ITAA 1997? | A4: Yes | Q5: Are receipts of interest from an interest-bearing bank account assessable income under: (i) section 6-5 of the ITAA 1997 or (ii) section 6-10 of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. The Entity is a non-profit entity but is not exempt for income tax purposes. 2. The Entity conducts workshops to their members and non-members whereby the vast majority of the attendees are members (however, the specific number ration of members to non-members varies from course to course and from year to year). 3. In relation to the workshops pricing is determined based on the estimated costs of hosting the relevant course with a margin for cost overruns, however and despite the fact that Members pay a lower price than anticipated, with fixed costs covered, much of these additional course fees gives rises to a surplus. 4. The Entity has both members who paid an annual membership fee and some members who are not required to pay a membership fee. The membership fee varies across different classes of paid members. 5. The Entity receives interest income from an interest bearing bank account. 6. The Entity receives sponsorship funding from sponsors.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 and | Income Tax Assessment Act 1997 section 6-10.


Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'. | Summary: The member contributions paid to the Entity their annual membership fees are not assessable income under: | Detailed reasoning: Not for profit organisations which are not exempt from income tax are taxable. They may need to lodge income tax returns and pay income tax. The Entity is a non-profitable company as it has the appropriate a non-profit clause and a dissolution clause. | Not all amounts of money or property the Entity receives will be assessable income. Receipts derived from mutual dealings with members of your organisations are not assessable income. This is due to the mutuality principle. | 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. | Organisations that can access mutuality is typically an organisation that is carried on for the benefit of its members collectively and not individually. The members of the organisation share a common purpose in which they all participate or entitled to do so. The main purpose for which the organisation was established, and is operated, is the common purpose of the members. There is a common fund that gives effect to the common purpose and all the members contribute to it. All the contributions to the common fund are applied for the collective benefit of all the members, in line with the common purpose. In accordance with the Entity's constitution, the Entity would be an organisation that can access the mutuality principle. | Different classes of membership may exist with varying subscription rates, rights and entitlements to facilities. The members have ownership and control of the common fund. The contributors to the common fund must be entitled to participate in any surplus of the common fund. If an organisation's constituent document prevents it from making any distribution to its members, and this is the only thing that prevents an amount of its income from being a mutual receipt, the organisation is not prevented from accessing mutuality for income tax purposes. The Entity has both paying members and non-paying members. For mutuality purposes, the non-paying members and members of the public are non-members. | When an organisation transacts with its members, it must ask itself if the activity is either a trade or something in the nature of trade producing a profit (a taxable purpose) or a mutual arrangement which, at most, gives rise to a surplus of funds to the organisation (a non-taxable purpose). As a result of the mutuality principle, receipts derived from mutual dealings with members are not assessable income (mutual receipts) and expenses incurred to get mutual receipts are not deductible. | In a mutual arrangement, there must be complete identity between contributors and participants as a class, not individually, in the surplus of common funds. The members collectively contribute and collectively benefit from the common fund. The payment of membership fees by the members of the Entity (although at various rates) collectively contribute to the common fund. The services produced e.g. a news update and research service, jobs board is provided to all members and funded from the common fund. | The mutuality principle provides that the annual subscription fee income from members is not assessable and similarly expenses incurred to provide services to members using this subscription income are not deductible. Mutual receipts include member subscriptions and levies. Hence, membership fees or contributions to the Entity are not assessable under either section 6-5 or section 6-10 of ITAA 1997. | Summary: The amounts that the Entity's members pay to attend workshops organised by the Entity are not assessable income under section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997. | Detailed reasoning: The courts and tax law confirm that a mutual organisation may be carrying a business (or trade) if various indicators are present. The indicators of business are outlined in taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? The capacity to earn and distribute profits need not be present before an activity of a not-for profit entity has the form of a business. | For not for profit organisations that are non-profit companies, the income tax law classifies mutual receipts as non-assessable, non-exempt income. | Mutual receipts include amounts members pay to attend a talk, workshop or presentation arranged by the organisation. Similarly expenses incurred to provide additional services (education courses) to members are not deductible due to the mutuality principle as these receipts are not assessable. Hence, the receipts from workshops provided to the members of the Entity are not assessable income as they are mutual receipts even though they are in the nature of trade. | Summary: The amounts that the Entity's non-members pay to attend workshops organised by the Entity will be assessable income under section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997. | Detailed reasoning: Some amounts received by a non-profit organisation will be assessable income. Assessable income is any amount that is ordinary income which includes income from carrying on trading activities. | Assessable income includes receipts from trading with non-members and income from sources outside the organisation. | Receipts that are assessable income include amounts non-members pay to attend a talk, presentation or workshop arranged by the organisation. | Apportion-able revenue is revenue that comprises both assessable and non-assessable income. This revenue needs to be separated using a practical and suitable method. | Revenue that may need to be apportioned includes amounts members and non-members pay to attend a talk, workshop or presentation arranged by the organisation. Hence, amounts that the Entity's non-members pay to attend workshops organised by the Entity will be assessable income under section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997. | Summary: The receipts from sponsorship activities received by the Entity are assessable income. | Detailed reasoning: Under a sponsorship arrangement, when an organisation undertakes a fundraising activity it often receives support in the form of money. In return, it may provide such things as advertising, signage or naming rights or some other type of benefit of value. | This means that the sponsor receives something of value in return for the sponsorship, so sponsorship payment is not a gift. The payment is fully assessable because of the commercial nature of the sponsorship agreement. Hence, the receipts from sponsorship activities received by the Entity are assessable income. | Summary: The receipts of interest income from the interest bearing bank accounts received by the Entity are assessable. | Detailed reasoning: Assessable income includes the interest income from bank accounts received by the Entity as it is income through investment and not a mutual receipt of the Entity.