The Government will amend the income tax law to ensure certain not-for-profit organisations are not subject to tax on income as a result of a recent High Court decision. The Government's actions will restore the long-standing benefits of the 'mutuality principle'.
"This announcement honours the Government's commitment made during the election. It addresses the concerns raised about the impact of judicial decisions arising from litigation between Coleambally Irrigation Mutual Co-operative Ltd and the Commissioner of Taxation," Minister for Revenue and Assistant Treasurer, Mal Brough, said today.
Under the mutuality principle, which has been established under the general law, membership subscriptions and receipts from other mutual dealings with members are exempt from income tax. Not-for-profit organisations that benefit from the mutuality principle include clubs, professional organisations and friendly societies.
On 27 May 2005, the High Court decided not to grant Coleambally Irrigation Mutual Co-operative Ltd leave to appeal a decision that the principle of mutuality cannot apply where the members of an organisation are prevented from obtaining the value of the assets on its winding up.
The amendment to the Income Tax Assessment Act 1997 will provide that the mutuality principle may apply to affected not-for-profit organisations even though the organisation is precluded from distributing to members on winding up. On winding up, any surplus would be required to be distributed to another not-for-profit organisation. The Tax Office estimates that around 200,000 to 300,000 organisations (largely RSL and social clubs) would potentially have become subject to tax on receipts that the Tax Office had previously considered to be excluded from assessable income under the mutuality principle.
The amendment will give legislative backing to the Tax Office practice that applied to distribution clauses prior to the judicial decisions.