Private ruling: Mutuality Principle
Published: December 2014
Ruling period: Year ended 30 July 2015 | Year ended 30 July 2016 | Year ended 30 July 2017 | Year ended 30 July 2018 | Year ended 30 July 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Club considered to be a 'non-profit company' for the purposes of section 3 of the Income Tax Rates Act 1986 ('the Rates Act')? | A1: Yes. | Q2: Are the types of income listed under 'non-mutual income' on the financial statements of the Club being bank interest, external fund interest and funds for special financial needs, assessable income under section 6-5 of the Income Tax Assessment Act 1997 ('ITAA 1997')? | A2: Yes, except where the funds for special financial needs are received from the Club through funds from its members, or already available funds held by the Club.

Relevant facts and circumstances: The Club is an organisation that receives fees from its members. It is one of about 1,000 private clubs working under the oversight of the Head Club. The by-laws of the Club contain the clauses that prevent the distribution of profits to its members by way of a dividend or otherwise, or on its winding up. The financial statements of the Club for the 200X to 20XX years show no distributions made to members by way of dividend or otherwise. The financial statements of the Club list the following types of income as non-mutual receipts: 1. Bank interest 2. External fund interest 3. Funds for special financial needs Bank interest is received as a result of funds deposited in to a bank by the Club. The external fund interest is administered by the charity arm of the Head Club. The purpose of the charity arm is to gain money to distribute for charitable purposes. The external fund receives contributions from each of the clubs in the area, including the Club. Each individual club receives a quarterly distribution from the external fund. They receive most of the interest, except a small percentage which is kept by the Head Club. The funds for special financial needs are received on application by an individual member who is in financial need. The funds can be received from the Club or from the Head Club. Where the funds are received from the Club, the funds are provided by its members in addition to regular membership dues, or otherwise sourced from available funds, such as previous distributions made from the external fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 59-35 | Income Tax Rates Act 1986 section 3

Reasons for decision: Summary: The Club is a 'non-profit company' pursuant to section 3 of the Rates Act as its by-laws contain clauses preventing it from making any distribution to its members, both during its operation and upon its winding up. | Detailed Reasoning - Detailed reasoning: Section 3 of the Rates Act defines a 'non-profit company' as: (a) a company that is not carried on for the purposes of profit or gain to its individual members and is, by the terms of the company's constituent document, prohibited from making any distribution, whether in money, property or otherwise, to its members; or (b) a friendly society dispensary. The ATO publication Mutuality and taxable income (NAT 73436) provides further guidance: The prohibition on distributions applies while the organisation is operating and on its winding up. If it permits its members to transfer the assets to themselves on winding up, it is not a non-profit company. Application to the taxpayer's circumstances The by-laws of the Club contain clauses that prevent the distribution of profits to its members by way of a dividend or otherwise during its operation, or on its winding up. This demonstrates that it is not operating with a view to make any profit or gain. As a result, we consider the Club to be a 'non-profit company' for the purposes of section 3 of the Rates Act. | Summary: The mutuality principle does not apply to bank interest, external fund interest and funds for special financial needs received from the Head Club. They will be considered part of the assessable income of the Club, under section 6-5 of the ITAA 1997. | 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. 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 mutuality principle is not specifically mentioned in the ITAA 1997. However, it has been accepted and applied narrowly in relation to Australian taxation law. The principle is based on the proposition that a taxpayer cannot derive income from itself. The principle recognises that contributions by a club's members are not in the nature of income because income consists of monies derived from sources outside of the taxpayer ( Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334 at 337). The principle is summarised in Revesby Credit Union Co-operative Ltd v. Federal Commissioner of Taxation (1965) 112 CLR 564 at 574 where McTiernan J said: 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…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. Receipts derived by a taxpayer from mutual dealings with its members are not assessable income. Mutual receipts are listed in the ATO publication Mutuality and taxable income (NAT 73436) as including: • member subscriptions and levies; • fees from members using the organisation's facilities (for example, gyms, pools and squash courts); • drinks and food sold by the organisation to members; • amounts members pay to attend dinners, parties, dances or social functions arranged by the organisation; • amounts members pay to attend a talk, workshop or presentation arranged by the organisation; and • the sale of items, such as souvenirs, to members. Where a taxpayer's constituent document prevents it from making any distribution to its members, and this is the only factor that prevents an amount of its income to be a mutual receipt, section 59-35 of the ITAA 1997 applies to allow the taxpayer to access mutuality, by considering it to be non-assessable non-exempt income Other amounts received by a taxpayer from sources outside of the organisation will remain assessable income. Examples provided in the ATO publication Mutuality and taxable income (NAT 73436) include bank interest and dividends and other income from investments. Application to the taxpayer's circumstances The Club is an organisation that receives fees from its members. Its objects do not involve trade or profit making activities. Instead, it is carried on for the collective benefit of its members. Its by-laws contain a non-profit clause, as well as a winding up clause, that prevent it from making any distributions to its members, other than for bona fide commercial transactions. However, section 59-35 of the ITAA 1997 will allow the mutuality principle to apply, notwithstanding the by-laws preventing any distribution to its members. The financial statements of the Club list the following types of income as non-mutual receipts: 1. Bank interest; 2. External fund interest; and 3. Funds received for special financial needs. Bank interest is received as a result of funds deposited in to a bank by the Club. The external fund is administered by the charity arm of the Head Club. The purpose of the charity arm is to gain money to distribute for charitable purposes. The external fund receives contributions from each of the clubs in the area, including the Club. Each individual club receives a quarterly distribution from the external fund. They receive most of the interest, except a small percentage which is kept by the Head Club. The funds for special financial needs funds are received on application by an individual member who requires financial support. The funds can be received from the Club or from the Head Club. Where the funds are received from the Club, the funds are provided by its members in addition to regular membership dues, or otherwise sourced from available funds, such as previous distributions made from the external fund. As the bank interest and external fund interest are received from sources outside of the Club, we consider that the mutuality principle does not apply. As a result, they are included as part of the assessable income of the Club. In regards to the funds received for special financial needs, where the funds are received from the Club through additional funds provided by its members, the mutuality principle will apply. As a result, these funds will not be considered income, and will not be assessable. Where the funds for special financial needs are drawn from existing funds held by the Club, the funds will also not be considered income, as this will represent a reallocation of funds. However, if the funds for special financial needs are provided by the Head Club, then these funds will be considered to be provided by an external source, and so the mutuality principle will not apply. They would be included as part of the assessable income of the Club. As a result, of the types of income listed under 'non-mutual income' on the Club's financial statements, bank interest, external fund interest and funds for special financial needs received from the Head Club will be considered assessable income of the Club.