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Need for certainty for Not-for-profit organisations

By Peter McDonald The principle of mutuality is easy to understand. Or is it? Subscriptions and fees from members and payments received from members for particular services provided by the club, association or organisation are excluded from the assessable income of the club, association or organisation. As a consequence not-for-profit organisations are effectively only assessed on the income and expenses derived and incurred from external sources.
Where a number of persons contribute to a common fund created and controlled by them for a common purpose then the principle of mutuality applies to only assess income from external sources. The practical effect of this principle means that non members' activities such as interest, dividends, rent, lease premiums and trading receipts are treated as non member receipts and therefore are treated as assessable income. Concurrently the expenses directly related to that income (plus certain statutory deductions) can be claimed as deductible expenses.
The ATO has guidelines in place for registered clubs and other organizations and it would be fair to say that the system has worked well with both the clubs and the ATO comfortable with the application of the law.
That situation has now been turned on it head with up to 30,000 not-for-profit organisations in Australia now in fear that the principle of mutuality no longer applies and that all receipts whether from members or otherwise are fully assessable.
This turnaround has been caused by the judgment in the recent Coleambally Irrigation Mutual Co-operation Ltd Case wherein Justice Graeme Hill held that the principle of mutuality did not apply in that case because the organisation's constitution forbade the distribution of surplus funds to members, but allowed distribution to others. According to Justice Hill the consequence of that clause made it impossible to say that an organisation is 'œan entity to which contributions are made by its members and where those contributions remain the property of the members in the sense that expression is used in the cases as including a class of members'. On appeal, the decision of Justice Hill was upheld by the Full Federal Court.
The implication of this decision is far reaching and affects each and every incorporated club, association and organisation. State legislation and the requirements of the ATO are such that similar clauses are mandatory in all not-for-profit organistions if they want to be treated as not-for-profit organisations. There would be very few not-for-profit organisations that are not incorporated. Exposure of private assets to risk and the need to secure insurance cover are two driving factors.
The result of the Federal Court decision places each and every not-for-profit entity at risk. The ATO is currently considering the implication of the decision and its future approach. In the meantime there is considerable uncertainty and fear of the eventual approach.
The answer is quite simple, the newly elected Government must act immediately and decisively, and announce and implement a clarification to the law that accepts that the principle of mutuality applies, regardless of whether a constitution contains a clause prohibiting the distribution upon windup of surplus funds to its members.