Mutuality principle – what does it mean?
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.
Body Corporates & Income Tax
A Body Corporate is generally treated as a public company for income tax purposes and as such would pay tax on its net income were it not for the application of the principle of mutuality.
The mutuality principle applies to certain types of income and expenses of a Body Corporate. However, not all categories of income are treated the same way.
Amounts Contributed by Members of the Body Corporate
Generally speaking amounts contributed by members of the Body Corporate which form part of the fund used for the day to day expenses, general maintenance and repair of the common property or for the establishment of special purpose funds as set out under the Act (Administration &
Sinking Fund Levies for example) are mutual receipts and as such are not taxable.
Whether other receipts from members are mutual receipts depends on the nature of the transaction and must be decided on the facts and circumstances of each dealing by a process of evaluating and weighing a range of factors. Relevant considerations include:
- The relationship between an amount received by the strata title body and the common fund – that is, whether it is within matters that govern the mutual relationship between members such that it has the requisite link to the common fund.
- The purpose for which the payment is made – that is, whether the payment of an amount by a member to the strata title body is to meet the member’s proportion of their mutual liabilities.
- The capacity in which an amount is paid – that is, whether the member is dealing with the strata title body in their role as a member.
Interest income received by a Body Corporate can be either mutual or non-mutual income depending on the source of that income. Interest imposed on late levies for example is treated as mutual income and therefore not assessable whilst interest received on a term deposit is deemed non-mutual and is therefore assessable in the hands of the Body Corporate.
Income and Deductions Relating to Common Property
Things start to get a little more complicated where income is derived from the use of common property of the Body Corporate. Whilst income from the common property will generally be non-mutual in nature, and therefore taxable, the “ownership” of the common property utilised will determine who is liable for any associated tax.
Where legal title to the common property is owned by the Body Corporate as trustee, the income (and any associated deductions) would form part of the net income of the Body Corporate and be taxed accordingly. However, where legal and beneficial title to the common property is owned by the members, the members return the income and claim any deductions.
A common example of the above would be the leasing of the rooftop of a residential building to a telco for the purpose of placing a mobile phone tower there.
In all cases, it is recommended that the Committee of a Body Corporate consult their Body Corporate Manager and/or Tax Advisors for clarification on how specific items of Income should be treated.
Full details can be found in Taxation Ruling TR 2015/3 which can be accessed by the following link:
This article was contributed by Michael Thomas, Chartered Accountant – Property Audit Solutions