Taxation of mutuals

I noted here that Coleambally Irrigation Mutual Co-operative Limited lost its appeal to the Full Federal Court against the Fedreral Court’s decision that its income was taxable.

On 27 May 2005, the High Court decided not to grant Coleambally Irrigation Mutual Co-operative Ltd leave to appeal the decision that the principle of mutuality cannot apply where the members of an organisation are prevented under their Constitution from obtaining the value of the assets on its winding up.

The Minister for Revenue and Assistant Treasurer, Mal Brough, has announced that the Government will amend the income tax law to ensure mutual not-for-profit organisations are not subject to tax on income as a result of the High Court decision.

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.

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