INCOME TAX UNDER THE MUTUALITY PRINCIPLE: DEFENSIVE & PROACTIVE STRATEGIES
Written by Victor Hamit

The new Gaming Machine Regime in Victoria from 2012 will give many clubs the opportunity to review and reduce their income tax liability.  For those clubs that pay income tax under the mutuality principle and acquire gaming machine entitlements, there will be a fundamental shift in the arrangements for clubs in calculating their income tax liability.

Currently, the Australian Taxation Office (‘ATO’) considers revenue to clubs from gaming operations in Victoria as commission from a third party and therefore fully assessable to tax income.  Whereas, from 2012 gaming machine entitlements will produce income to the club and the amount of income generated by members will be excluded from assessment to income tax.  Only the income attributable to non-members will be assessable to income tax.  This will then be the same as the arrangements that currently exist in New South Wales.

The apportionment of expenses and calculation of the member proportion when calculating taxable income under the Mutuality Principle can be complex.  The ATO has produced a number of publications to assist clubs which are available from the ATO website:  www.ato.gov.au

The ATO in conjunction with Club Movement representatives and ClubsVIC are currently collaborating in producing a revised booklet to assist clubs.

The ATO considers that a club “is only assessable on trading income which relates to non-members and on income received from sources outside its general activities.  This is due to the principle of mutuality that recognizes that any surplus arising from contributions to a common fund created and controlled by people for a common purpose is not income”.  This principle is derived from case law and is now contained in the Income Tax Assessment Act.

The ATO has indicated that it will continue significant audit compliance activity on those clubs that are taxable under the Mutuality Principle.  It would be prudent for those clubs to be confident that their basis of calculating member/non-member proportions and allocating expenses can be justified and are up-to-date.  This may be seen as a defensive governance strategy.

On the other hand, obtaining proper advice may considerably reduce the club’s income tax liability from 2012.  The time to start planning is now.  This may be seen as a proactive governance strategy.

Article Published: ClubNEWS – Autumn/Winter 2010

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Victor Hamit
Wentworth Lawyers
Level 40,
140 William Street
MELBOURNE VIC 3000

Email: vhamit@wentworthlawyers.com.au
Website: www.wentworthlawyers.com.au

Tel: +61 3 9607 8380
Mobile: +61 408 590 706

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These materials are provided as a general guide on the subject only, not as specific advice on any particular matter or to any particular person. Please seek specific advice on your own particular circumstances as situations and facts vary.
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