Mutuality principle and rent

Is rent received from a club member assessable income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the rent received by the taxpayer, a club, does form part of the assessable income under section 6-5 of the ITAA 1997.

The taxpayer an incorporated club owns two factory units, one of which is used for club activities and the other is rented to a club member.

The rules of the taxpayer prohibit any surplus to be distributed to its members.

The principle of mutuality is based on the proposition that a taxpayer cannot derive income from itself. In the case of corporate entities, the principle recognises that contributions by proprietors are not in the nature of income because 'income consists of moneys derived from sources outside' of the taxpayer ( The Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334 at 337).

However, there are exceptions to this principle and some receipts from members may constitute income for the purpose of the ITAA 1997, section 6-5. For example, the principle will not apply to activities that are considered to be in the nature of trade as opposed to a mutual activity.

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: 'It is not membership or non-membership which determines immunity from or liability to tax; it is the nature of the transactions.'

Consequently, the question that must be posed to the taxpayer is: '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?' ( Fletcher v. ITC (1971) 3 All ER 1185). The taxpayer's activity involves the leasing of a factory unit to one club member. This activity is considered of a business nature rather than a mutual arrangement and would be fully assessable under ITAA 1997, section 6-5. The arrangement goes beyond a mutual arrangement and is in the nature of trade. Consequently, the income from the rental arrangement with the club member will form part of the assessable income of the taxpayer under the ITAA 1997, section 6-5.