Issue
Is the capital gain made on the sale of a property owned by an incorporated association disregarded under section 118-12 of the Income Tax Assessment Act 1997 (ITAA 1997) in circumstances where the principal of mutuality applies to any surplus accumulated by the association?
Decision
No. The capital gain is not disregarded under section 118-12 of the ITAA 1997.
Facts
An incorporated association owned, on behalf of its members, a property which had been purchased from the contributions made by the members.
The property was used and maintained solely as an administration centre to collect member subscriptions and to administer activities held for the benefit of members.
The property was sold and a capital gain was made.
The association is not an entity that is exempt from tax under any of the categories in Subdivision 50-A of the ITAA 1997.
Reasons for Decision
The principle of mutuality is a common law doctrine which recognises that one cannot make a profit out of oneself. As such, a person's income consists only of moneys derived from external sources. This was the basis of the decision in Bohemians Club v. Acting FC of T (1918) 24 CLR 334, where it was held that the surplus of subscriptions and contributions from club members over the expenditure of the club did not constitute income derived by the club. This view has been reaffirmed in many subsequent cases.
The principle of mutuality does not apply to a surplus that is derived from sources outside the contributors to the common fund such as interest from the investment of part of the fund ( Revesby Credit Union C-Operative Ltd v. FC of T (1965) 112 CLR 564. Any surplus repaid to contributors must be a return of their contributions not a return on their contributions ( Fletcher v. I T Comm (1971) 3 All ER 1185).
Section 118-12 of the ITAA 1997 provides that a capital gain or capital loss made from a CGT asset that is used solely to produce 'exempt income' is disregarded. 'Exempt income' is ordinary income or statutory income that is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law (section 6-20 of the ITAA 1997).
It has been established by the courts that mutual receipts are not income. If an amount is not income it cannot be 'exempt income'. This view is expressed in Taxation Determination TD 92/181.
On this basis, the property in question was not used to derive 'exempt income'. It follows that the capital gain made on the sale of the property used as the Association's administration centre is not disregarded under section 118-12 of the ITAA 1997.