Commissioner of Taxation v Music Traders Association
[1990] FCA 261
•18 JUNE 1990
Re: COMMISSIONER OF TAXATION
And: AUSTRALIAN MUSIC TRADERS ASSOCIATION
No. G303 of 1989
FED No. 261
Taxation
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies(1), Wilcox(2) and Foster(3) JJ.
CATCHWORDS
Taxation - Income tax - Application of "mutuality principle" - Moneys received by unincorporated association as sponsor of musical exhibition arranged on its behalf by independent professional organiser - Amount of payment affected by minimum display space at exhibition taken by Association members - Constitution of Association prohibited payments to members and provided for transfer of assets on dissolution to a like organisation to be selected by the members at that time - Lack of relationship between contributions and benefits - Moneys became part of general Association funds, not held for members.
Income Tax Assessment Act 1936 s.25
HEARING
SYDNEY
#DATE 18:6:1990
Counsel for the Applicant: Mr S.W. Gibb
Solicitors for the Applicant: Australian Government Solicitor
Counsel for the Respondent: Mr G.J. Hatcher
Solicitors for the Respondent: Henderson, Taylor and Mitchell
ORDER
1. The appeal be allowed.
2. The decision of the Administrative Appeals Tribunal
made on 11 May 1989 be set aside and in lieu thereof it be decided that the objection decision be affirmed.
3. The applicant pay to the respondent its costs of this proceeding.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
I have had an opportunity to read the reasons for judgment prepared by Wilcox J. I agree with his Honour's exposition of the facts and of the law but would add a few words of my own.
In issue is the application of the principle of mutuality as enunciated in cases such as New York Life Insurance Co v. Styles (1889) 14 App Cas 381, Carlisle and Silloth Golf Club v. Smith (1912) 2 KB 177, Municipal Mutual Insurance Ltd v. Hills (1931) 16 TC 430, Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334, Revesby Credit Union Co-operative Ltd v. Commissioner of Taxation (1965) 112 CLR 564, Social Credit Savings and Loan Society Ltd v. Federal Commissioner of Taxation (1971) 125 CLR 560, Fletcher v. Income Tax Commissioner (1971) 3 All ER 1185, Sydney Water Board Employees' Credit Union Limited v. Federal Commissioner of Taxation (1973) 129 CLR 446 ("Sydney Water Board"), and Royal Automobile Club of Victoria v. Federal Commissioner of Taxation (1973) 73 ATC 4153 ("R.A.C.V.").
It is not in dispute that the taxpayer, Australian Music Traders Association, is a mutual association for the purposes of that principle or that many of its receipts are of a mutual character. But, as was pointed out in Sydney Water Board and in R.A.C.V., the fact that an organisation is a mutual organisation does not mean that all of its receipts, even receipts from members, are within the principle. An activity may or may not be undertaken on a mutual basis.
The principle of mutuality applies when a number of persons associate together for a common purpose, and contribute to a common fund in which all are interested. See Social Credit Savings and Loan Society Ltd v. Federal Commissioner of Taxation per Gibbs J. at pp 570-5 and Sydney Water Board per Mason J., with whom Barwick C.J., Menzies, Walsh and Stephen JJ. agreed, at pp 455-8. In Fletcher v. Income Tax Commissioner, Lord Wilberforce emphasised, at p 1191 that:-
"... if mutuality is to have any meaning there must be a reasonable relationship, contemplated or in the result, between what a member contributes and what, with due allowance for interim benefits or enjoyment, he may expect or be entitled to draw from the fund: between his liabilities and his rights."
His Lordship drew the distinction between a mutual activity which does not give rise to profits and a trading activity which does. At p 1189, his Lordship explained:-
"Cases in which groups of persons making contributions towards a common purpose have been held not liable for tax on any surplus over expenditure fall under a number of heads. The expression 'the mutuality principle' has been devised to express the basis for exemption of these groups from taxation. It is a convenient expression, but the situations it covers are not in all respects alike. In some cases the essence of the matter is that the group of persons in question is not in any sense trading, so the starting point for an assessment for income tax in respect of trading profits does not exist. In other cases, there may be in some sense a trading activity, but the objective, or the outcome, is not profits, it is merely to cover expenditure and to return any surplus, directly or indirectly, sooner or later, to the members of the group. These two criteria often, perhaps generally, overlap; since one of the criteria of a trade is the intention to make profits, and a surplus comes to be called a profit if it derives from a trade. So the issue is better framed as one question, rather than two: is the activity, on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or is it, on the other, a mutual arrangement which, at most, gives rise to a surplus?"
Thus, in a social club, one finds a number of persons associated together, not to trade with each other or for profit, but to acquire and maintain a social facility benefitting all members. In mutual insurance, one finds a common fund in which all contributors are entitled to participate more or less equally having regard to their contributions and contractual rights. Their mutual dealings do not give rise to profit. Though the concept of mutuality has not been definitively delineated, its crux is an association of persons who have joined together not for trade or profit but to achieve through their mutual contributions a common end or benefit in which all members participate or are entitled to do so.
Apart from R.A.C.V., to which the learned presidential member constituting the Administrative Appeals Tribunal does not appear to have been referred, particular mention should be made of Sydney Water Board and English and Scottish Joint Co-operative Wholesale Society Ltd v. Commissioner of Agricultural Income - Tax, Assam (1948) AC 405. In Sydney Water Board, it was held that the interest paid by individual members on borrowings from their Credit Union were not contributions by those members to a common fund but simply the cost of obtaining their individual loans. In the Assam Tea case, whilst it was not in dispute that there were mutual elements in the association, it was held that the sale of tea to members of the association, who then on-sold, was a trading, not a mutual activity.
The activities with which we are concerned in this appeal centre around the holding of a music traders' trade fair. In years prior to the subject year of income, the Association itself organised the trade fairs and leased stalls to music traders. Although the rental received by the Association from such stall holders as were members of the Association was accepted by the Commissioner of Taxation to be mutual, nevertheless, as the individual traders displayed and sold their wares to members of the public, it may be doubted whether the fairs had a mutual character. Each trader, many of whom were not members of the Association, carried on his individual business. The rental paid was calculated according to the space occupied and was the charge made for the space leased by the stall holder for the purposes of his own business activity. Even in respect of those years, it is difficult to distinguish the facts from those which were the subject of the decisions in the Assam Tea case and Sydney Water Board.
In the year of income now in question, the year ended 30 June 1985, the Association arranged for a separate organisation, Exhibition and Trade Fair Pty Ltd, to organise the fair. The fee which the Association received from the organiser was fixed by their agreement, though referrable in part to the total space sublet by the organiser to members of the Association and non-members alike. No strand of mutuality remained. No contribution was made by any member of the Association to the Association in respect of the fair.
In R.A.C.V., at p 4161, Anderson J. described the overseas' travel service as follows:-
"This service was available to members and non-members alike. No charge was made to the person who availed himself of this service, but the appellant received commission from airlines, other carriers, hotels and the like when bookings were made through the appellant."
Anderson J. held that there was no element of mutuality in respect of this service. His Honour also considered that the advertising receipts from the publication of the "Royalauto" were not mutual. His Honour noted that both parties "were in agreement that the journal could probably be regarded as a mutual activity" but held, nevertheless, that "the appellant was in the business for the purposes of selling space to the advertisers" and that the mutual aspect of the Royalauto "did not, however, to my mind, alter the nature of the transaction so far as the advertisers were concerned". Similarly, His Honour held that the commissions paid to the R.A.C.V. by the Club Motor Insurance Agency Pty Ltd, calculated according to the insurance premiums paid by members of the R.A.C.V. to Club Motor, were not mutual receipts.
Like considerations apply with even greater force in the present case. The fee paid by the organisers of the fair to the Association was not a fee payable by members of the Association into a common fund. And the fair, though it benefitted members of the Association, was not a mutual, non-profit activity. Its essence was that of trading for profit by individual traders, though through the medium of a common activity, the fair.
Accordingly, the Administrative Appeals Tribunal was in error in law in holding that the Association's receipts from the organiser of the fair were receipts which had a mutual character. In my opinion, as a matter of law, having regard to the facts of the case, the subject receipts were income assessable under s.25(1) of the Income Tax Assessment Act 1936 (Cth).
I concur in the orders proposed by Wilcox J.
JUDGE2
The question at issue in this appeal is whether the "mutuality principle" operates to protect from taxation moneys received by the respondent, Australian Music Traders Association, as a result of the 1984 Australian Music Exhibition. The Administrative Appeals Tribunal so held and the Commissioner of Taxation appeals against that decision, contending that it was erroneous in point of law. For the purpose of this case the Tribunal was constituted by Purvis J, a member of the Family Court of Australia. Accordingly, the application comes directly to a Full Court of this Court: see s.20(2) of the Federal Court of Australia Act 1976.
The facts
The Australian Music Traders Association ("the Association") is an association of companies, firms and persons engaged in the importation and sale of musical instruments, sheet music, gramophone records and the like. The Association was formed in 1977 pursuant to a Constitution which specified 20 objects. They included:
"(1) To protect and promote the interests of wholesalers, importers, dealers, agents and all other persons engaged in the industry of importing, selling by wholesale and dealing by wholesale in musical instruments and their accessories, sheet music, gramaphone
(sic) records, amplification equipment and the like throughout Australia. ....
(10)To organise conduct and manage music trade fairs in Australia and elsewhere and to arrange for the exhibition at such fairs of goods dealt in by members and other goods related to the music industry."
The Constitution included a clause dealing with dissolution, as follows:
"The Association shall be dissolved only by a resolution carried by a two-thirds majority of members of the Association present in person or by proxy at an extraordinary general meeting of members called for that purpose. Not less than seven days notice in writing of any such meeting shall be given and such notice shall contain full particulars of the proposal for dissolution.
If upon the dissolution of the Association there remains after satisfaction of all its debts and liabilities any property whatsoever such property shall not be paid to or distributed among the members of the Association but shall be given or transferred to some other institution or institutions having objects similar to the objects of the Association, such institution or institutions to be determined by the members of the Association at or before the time of dissolution."
From the time of its formation in 1984, the Association itself conducted an annual music exhibition using the voluntary services of members. However, in 1984 the Association decided to retain a professional organiser, Exhibitions and Trade Fairs Pty Limited. An agreement was executed on 8 May 1984. Clause 1 of the agreement provided for the appointment by the Association ("the Sponsor") of Exhibitions and Trade Fairs ("the Organiser") "to organise, stage and manage for the next three years the Exhibition known as the Australian Music Exhibition". Clause 2 contained covenants by the Organiser, including, by sub.cl.(3):
"(3)To open a bank account in a name to be determined by the parties where will be deposited all money received by the organisers from exhibition space sales and that unless agreed by the Sponsor, the funds will be used firstly to discharge the Sponsor's liability for rental, cleaning and electrical costs (if any) relating to the Exhibition to the Venue;"
The bank account was to be jointly operated by the parties.
Clause 4 of the agreement imposed financial responsibility for the exhibition upon Exhibitions and Trade Fairs. It provided:
"The Organisers shall be liable for all debts incurred in connection with the organisation, staging and management of the Exhibition and agree to promptly pay all such debts as and when they fall due. The Organisers shall not represent or otherwise suggest to any person that the Organisers are Agents or employees of or have the backing or support of the Sponsor, financial or otherwise, in respect of any contract or order for the supply of goods or services, lease, application for credit or other agreement or transaction whatsoever. The Organisers agree to indemnify and hold the Sponsor harmless from and against any and all claims, responsibilities and damages and any costs or expenses that may be sustained by the Sponsor in connection with the organisation, staging and management of the Exhibition by the Organisers or of a default by the Organiser in the aforesaid obligations.".
Clause 5 cast upon the Association certain responsibilities, including that of promoting the exhibition in its publications. Clause 6 dealt with remuneration. Relevantly, it provided:
"6. In consideration of this agreement and the appointment in Clause 1 hereof the Sponsor shall be entitled to receive out of the moneys contributed by its members to the Exhibition an amount calculated in accordance with the following formula:
(a) FOR THE EXHIBITION YEAR 1984 $13,000.00 plus $1,000.00 for every 100 square metres of floor space sold in excess of 1800 square metres up to and including 2400 square metres;
(b) FOR THE EXHIBITION YEAR 1985 ...
(c) FOR THE EXHIBITION YEAR 1986 ..."
It is not necessary to refer to the remaining clauses of the agreement, except to note that the parties agreed, by cl.14, that nothing in the agreement was to constitute a relationship of agent, employee, partnership or joint venture between the parties "and it is hereby expressly agreed that the Sponsor and the Organisers are independent contracting parties and have not authority, one for or on behalf of the other to enter into any contract, to accept money, to make any warranties or representations as (sic) to assume any obligations whatsoever".
The 1984 exhibition was held from 10 to 13 August 1984. Forty eight companies, firms or individuals took display space, allocated pursuant to written agreements made by each of them with Exhibitions and Trade Fairs. These agreements set out details of the space to be occupied and the charge therefor, calculated at a rate per square metre. The conditions embodied in the agreement were normal conditions for a contract of this type. No distinction was made in the agreements between exhibitors who were members of the Association and exhibitors who were not, whether in relation to charges, conditions or anything else. The total space taken by members of the Association easily exceeded the 2400 square metres referred to in cl.6(a) of the agreement between the Association and Exhibitions and Trade Fairs. Consequently, that sub-clause operated to entitle the Association to receive $19,000 out of the moneys received from exhibitors. This money was paid to the Association on 6 September 1984.
The AAT reviewIn his assessment of taxation, under the Income Tax Assessment Act 1936, for the year ended 30 June 1985 the Commissioner of Taxation adjusted the return, amongst other adjustments, so as to include this sum of $19,000 as taxable income of the Association. The Association objected to this adjustment contending that the receipt was covered by the "mutuality principle". However, the Commission disallowed that objection. By a letter dated 3 June 1986, the Association's accountants requested that the disallowance be referred to a Board of Review. Before that was done, on 1 July 1986, the jurisdiction formerly exercised by the Boards of Review was transferred to the Administrative Appeals Tribunal. Accordingly, in due course the matter went before Purvis J. In order to understand the nature of the issues presented to the Tribunal it is convenient to quote Purvis J's summary of the arguments put to him:
"The applicant ... submitted that the moneys received by it from the organizer should not be brought to tax and should not be regarded as income subject to tax pursuant to Section 25(1) of the Income Tax Assessment Act. That is, the applicant submitted that the principle of mutuality based as it is upon the proposition that one cannot derive income from one's own self should be applied to the circumstances of this case and where the Association was comprised of the persons from whom the moneys were received. It was said that the members of the Association had joined together to form the Association and contributed to a common fund created and controlled for the benefit of all members of the Association, irrespective of the proportions in which the contributions were made. Accordingly, the sum of the moneys paid by the members, that is, the $19,000, be it indirectly to the Association, was not income subject to tax.
The respondent contended that the situation was otherwise and that the applicant was a resident association in the business of inter alia promoting the Australian music industry and the interests of its members. It was said that the amount of $19,000 was received by the Association in the ordinary course of its business, was fully assessable and not a capital receipt. It was not contended that the moneys so received were of a capital nature.
The respondent, consistent with the assessment issued, and the contention that mutuality did not apply to exclude the moneys received from the taxable income of the applicant, relied upon the fact that, the members of the applicant taxpayer were not entitled, pursuant to the Constitution of the Association, to participate in any surplus of funds upon a dissolution of the Association. It was submitted on behalf of the Commissioner that where a club in its constitution provides for the non return to members of a surplus arising on dissolution that mutuality does not apply, and members' subscriptions, for example, are in these circumstances to be included in the club income for the purpose of arriving at its assessable income."
After referring to a number of authorities cited by the parties, Purvis J dealt with two further submissions on behalf of the Commissioner. The first was:
"... that the amount of $19,000 paid to the taxpayer by the organizer was paid pursuant to an agreement to which the members of the Association were not parties. Hence no mutuality. It was said that the doctrine of privity of contract applied and that accordingly, the payment made by the organizer could not be said to be from funds obtained out of moneys paid by members. The factual evidence was otherwise. It is quite apparent that by reason of the agreement between the Association and the organizer, and the agreement between the member and the organizer, reciting as it does the involvement of the Association, that the payment made by the member calculated on a floor space basis is directly related to the payment made by the organizer to the Association, likewise based on a floor space basis.
It was further contended on behalf of the respondent that no part of the $19,000 paid to the Association pursuant to the agreement 'constituted payments of subscriptions by members'. Hence no mutuality. However, it is clear on the evidence that the means utilized whereby members made payment to the Association by way of the organizer was one of convenience to the Association and the organizer and not otherwise. It was clearly envisaged that the organizer would be making a payment to the Association proportionate to space taken by members and out of the 'contributions' made by such members. Whether by 'subscription' or 'contribution', the money came from members. It was further said that the subject amount was paid to the Association pursuant to an agreement with a non-member of the Association, the organizer, and accordingly, an amount derived from sources outside the Association. I do not accept this to have been so. The Association, being one entitled to enter into an agreement pursuant to its Constitution by its authorized officers, agreed on behalf of its members that payment would be made to it by the organizer out of contributions paid to the organizer by members. The necessary nexus is clearly established."
Purvis J then set out his formal findings:
"In this matter, the Tribunal finds that the payments made by members of the Association to the organizer out of which moneys the organizer, pursuant to the agreement, made payment to the sponsor, the Association, such moneys then to be retained by the sponsor and used by it in furtherance of its objects, was money advanced by the members for a common purpose. It is implicit from the evidence that if the $19,000 was not to be paid to the sponsor that then the charge made in respect of floor space would have been other than what it was. It would have been correspondingly less. The clause in the Constitution relied upon by the respondent referrable to distribution of any surplus arising on dissolution places the disposal of any such surplus at the decision of the members of the Association. Accordingly, it is the view of the Tribunal that not only are the funds of the Association pursuant to the Constitution owned by the members of the Association, but they are controlled wholly by such members. A decision as to disposition is one for the members and they control such disposition. No other person has a part to play in the use to which the funds are to be put."
The reasons concluded:
"The Tribunal is of the opinion that the principle of mutuality does apply in the circumstances of this matter ... . The moneys received by the Association were so received as a consequence of moneys having been advanced by members and were paid out of a fund into which such moneys had been placed. The fact that the moneys paid by members to the organizer might have been intermixed with other moneys received by the organizer from non-members does not preclude this conclusion being available. The Association was one controlled by its members. The disposition of its funds was at their discretion and subject to their decision."
Purvis J made an order setting aside the decision under review and referring the matter back to the respondent for the issue of an assessment in accordance with his reasons.
An appeal to this Court, from a decision of the Administrative Appeals Tribunal, lies only on a matter of law: see s.44(1) of the Administrative Appeals Tribunal Act 1975. However, the facts of the present case are not in dispute. Some criticism has been offered of certain of the conclusions expressed by Purvis J, but these conclusions relate to the effect of the agreement. Any mis-statement of the effect of the agreement would be a mistake of law. In this connection, although they are of little significance, it seems to me, with respect, that there were some such mis-statements. For example, the statement "that the payment made by the member calculated on a floor space basis is directly related to the payment made by the organizer to the Association" is true only in the sense that the amount of money paid pursuant to cl.6(a) of the agreement, up to $19,000, depended upon the amount of floor space taken by members. But once the figure of 2400 square metres was exceeded, as on the evidence it comfortably was, the amount of space taken by members became immaterial. The same comment may be made about the further observation of Purvis J that it was envisaged "that the organizer would be making a payment to the Association proportionate to space taken by members". Finally, as was indicated by Purvis J's use of the word "implicit", there was no evidence that, absent the requirement to pay $19,000 to the Association, the charges made to exhibitors "would have been correspondingly less". For all the evidence reveals, the laws of supply and demand may have enabled Exhibitions and Trade Fairs to maintain the same level of charges. It is, perhaps, significant that non-members - who were, presumably, not moved by benevolence towards the Association - were prepared to pay the same rates as members.
The "mutuality principle"In its early formulations, the "mutuality principle" was generally associated with insurance. An early statement of the principle was made by Lord Watson in New York Life Insurance Company v. Styles (1889) 14 App Case 381 at p 394:
"When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities, or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits. ... In my opinion, a member of the appellant company, when he pays a premium, makes a rateable contribution to a common fund, in which he and his co-partners are jointly interested, and which is divisible among them, at the times and under the conditions specified in their policies. He pays according to an estimate of the amount which will be required for the common benefit; if his contribution proves to be insufficient he must make good the deficiency; if it exceeds what is ultimately found to be requisite, the excess is returned to him. For these reasons I have come to the conclusion that the transactions of the appellant company, in so far as these relate to participating policies, do not constitute the carrying on of a trade, within the meaning of the Income Tax Acts, and that the surplus funds returned or credited to its members are not profits."
The House of Lords followed Styles in Jones v. South-West Lancashire Coal Owners' Association Limited (1927) AC 827. The respondent was a company limited by guarantee having as its sole effective purpose the indemnity of its members, who were all coal owners, against liability for compensation in respect of fatal accidents to employees. Every person indemnified by the Association was a member of the Association and every member was indemnified. A fund was maintained by means of annual calls on members in proportion to their disbursements for wages and salaries. The members were to be indemnified out of this fund. At the end of the year any surplus was carried over to a reserve fund. There was provision under the respondent's articles for extraordinary calls on members, for the substitution of a transferee, in the event of a member selling a mine, and for a payment out to a member or his representative on death or bankruptcy. However, subject to these provisions, the contributions were to remain with the company and, in the event of a winding up, were to be divided among the members in prescribed portions.
The House of Lords was urged to distinguish Styles on the basis that these facts did not include an annual return to members of any surplus. But this ground of distinction was unanimously rejected. Viscount Cave LC, with whom the other members of the House agreed, dealt with the matter in this way, at p 832:
"In this case, as in (Styles), there are no shareholders interested, and the whole of the yearly surplus remains to the credit of the members, and must either be applied to meeting their future claims or be returned to them on retirement. Sooner or later, in meal or in malt, the whole of the company's receipts must go back to the policy holders as a class, though not precisely in the proportions in which they have contributed to them; and the association does not in any true sense make a profit out of their contributions. It may be added that in that case, as in this, some part of the receipts of each year was carried forward as funds in hand."
Viscount Cave also held that it made no difference that the persons involved in the mutual insurance scheme had created a corporate vehicle to achieve their purpose.
Five years later, in Municipal Mutual Insurance Limited v. Hills (1932) 16 TC 430, the House of Lords distinguished Styles and Jones. The appellant company was formed by various local authorities primarily for the purpose of enabling them to insure against fire on favourable terms. The effective control of the company was held by fire policy holders, who alone were entitled to the surplus assets of the company on a winding up. However, in the course of time, the company also undertook an extensive business in employers' liability and other insurances, both with fire policy holders and others. The revenue authorities conceded that the fire insurance business of the company was a business of mutual insurance which did not attract liability to income tax. The company agreed that it was liable for tax on its profits from employers' liability and other insurances undertaken on behalf of persons who were not fire policy holders. But there was an issue between the parties as to whether the company was taxable on the profits which it earned on such insurances with fire policy holders.
At first instance Rowlatt J dealt with the critical question in this way, at p 438:
"Of course the word 'mutual' is used in insurance language to describe a certain class of company, and so on. But for the purposes of these decisions the point is ... whether there is any profit; that is to say, whether you get more than this, that a certain class of people are associating together to put up money to achieve an object for each other, and divide what is not wanted among themselves in that character, namely, in the character of the persons who put it up. That is what I understand is at the bottom of it. If you like to call that mutuality, well, it is a convenient word. That is what the essence of it is. In this case, I am bound to say, now that I think I understand it, the point seems pretty nearly unarguable, because I cannot see the slightest distinction between what is made out of a member in respect of non-fire business and what is made out of a stranger in respect of non-fire business; qua that business the member is a stranger. He is not, as a miscellaneous policy holder, getting any share in the miscellaneous policy business. The miscellaneous policy business is done for the benefit of the body of fire policy holders. They get it, and it might just as well be a stranger. I think this person is exactly in the same position as a shareholder of a railway company who takes a ticket by a train; for this purpose he is merely an outsider."
In the Court of Appeal the decision of Rowlatt J was affirmed, the Court being content simply to adopt his Lordship's reasoning. The House of Lords unanimously dismissed the company's further appeal. At p 441 Viscount Dunedin expressed the matter in this way:
"Any person, or set of persons, or company, carrying on the business of insurance, charges premiums and has to meet claims on the policies for which the premiums have been paid and, if it transpires in the course of business that the amount obtained by the premiums has been more than sufficient to meet the claims, this is a surplus. If that surplus is a profit it must bear Income Tax, secus if it is not; and whether it is a profit or not depends, as was found in the two cases, upon the question: To whom does it go? If it goes to the insurer or insurers it is a profit. If it simply goes back to the insured either in reduction of his premium or in enhancing the sum insured, it is in essence merely a return of his own money which he has overpaid and is not a profit. Now, it is found in this case as a fact, that as regards employers' liability business and miscellaneous business ... in no case is any redundant part of the premiums returnable to the contributors ... either in the shape of a reduction of premiums or in cash on cessation of the policy or on winding-up. All surpluses eventually go to the fire policy holders. In so far as the surplus arises from a fire policy, they are really entitled to the money as being those who contributed it and, accordingly, it has been admitted that any profit made on the fire policies is governed by (Styles). But as regards employers' liability business and miscellaneous business, it does not go to the contributors for, as fire policy holders in a body, they have not contributed and therefore this business is in the same position as business with complete outsiders, the surpluses in which are admitted to be profit."
In Australia, there are a number of non-insurance cases in which the mutuality principle has been invoked. The first of these cases to reach the High Court was Bohemians Club v. Acting Federal Commissioner of Taxation (1918) 24 CLR 334, in which the Court held that an unexpended surplus of members' subscriptions to a social club was not "income" for taxation purposes. In later years the principle was discussed in two first instance High Court decisions relating to credit unions: see Revesby Credit Union Co-operative Limited v. Commissioner of Taxation (1968) 112 CLR 564, noting especially the description of the principle at pp 574-575, and Social Credit Savings and Loans Society Limited v. Commissioner of Taxation (1971) 125 CLR 560. In the latter case, at pp 571-576, Gibbs J. emphasised the necessity for identicality between the contributors to the common fund and the participators in it.
The leading authority on the principle in Australia is Sydney Water Board Employees' Credit Union Limited v. Commissioner of Taxation (1973) 129 CLR 446, a decision of the Full High Court. The material facts were summarised in the headnote:
"The taxpayer was a credit union which borrowed moneys from its members. It also borrowed moneys, to a much smaller amount, from non-members, on fixed deposit. The moneys borrowed were re-lent by it to members, but the class of borrowing members was not identical with the class of lending members; some borrowing members did not lend moneys to the taxpayer, and some lending members did not borrow. The taxpayer received interest on the moneys lent by it, and in the material years it obtained surpluses over its expenditure. Its rules provided that its surpluses were applicable, first, in payment of at least five per cent per annum to a reserve fund (which was not distributable to members except in the event of its winding up and then only to members to whom loans had been made) and secondly, in payment to members as a rebate of interest paid so due by borrowing members, 'such rebate being based on the business done by such members'. It was also provided that on a winding up members were not, in respect of their shares, entitled to receive any surplus in excess of the amount paid up on them, and any surplus was distributable only to members to whom loans had been made."
The issue in the appeal was whether the interest received by the credit union from its members was taxable under the Income Tax Assessment Act. The Court unanimously held that the interest was taxable. In short reasons, Barwick CJ criticised the use of the description "mutuality principle" but he also indicated that the so-called principle was not confined to cases dealing with insurance, or social or sporting clubs. His Honour went on expressly to adopt the reasons of Mason J, as did the remaining members of the Court, Menzies, Walsh and Stephen JJ.
Mason J rejected two submissions made on behalf of the Commissioner: that there is no place for the mutuality principle in the Income Tax Assessment Act; and, alternatively, that the principle is limited to the field of insurance. But he upheld the Commissioner's further submission that the instant case did not fall within the principle. At p 457 his Honour noted three "established applications of the principle".
"First, the circumstances that the contributors are shareholders in a company which has been incorporated as a convenient agent, for them and that their contributions are paid to a fund in the hands of the company, are not enough in themselves to invest any refunds with the character of income. Secondly, the Court will determine for itself whether the contributions have the character of income, notwithstanding that they have been described in the taxpayer's documents as having that character. Thirdly, the principle may be invoked by an association which engages in business activities with outsiders, in addition to the transactions which it has with its members, to the extent that it is possible to sever from the business activities the fund which consists of receipts from mutual dealings."
However, Mason J went on to comment that:
"... these propositions do not in any way detract from the formulation in Styles' Case of the conditions according to which the principle will come to the aid of a taxpayer. In later cases different language has at times been employed in giving emphasis to particular aspects of the principle in its application to new circumstances. Conformably with the original concept that the return of surplus funds is a refund to the contributors of their own money, it has been said that there must exist an 'identity' between the contributors and the participators. In Municipal Mutual Insurance Ltd. v. Hills, (at p 448), Lord Macmillan said there must be a 'complete identity'. On other occasions it has been pointed out that the identity required is not an identity between individuals but an identity between classes ... Again, with the same end in view, although it has not been insisted that the refund to contributors should be in precisely the same proportions in which they have contributed to the fund, it has been said that there must be a reasonable relationship between what a member contributes and what he may be expected or entitled to receive from the fund."
At p 458 Mason J turned to the facts of the case, pointing out that the "so-called 'contributors', the borrowing members", were a proportion only of the total class of members.
"The taxpayer was not incorporated as a convenient agent for them, as distinct from the entire class of members. The suggestion that the amount of interest paid in a particular year is the common fund is artificial for neither the taxpayer's rules, nor its accounts, nor its mode of conducting business lends any support to the suggestion or to the notion that it is a fund in which the borrowing members as a class have any rights. ...
In other important respects the circumstances do not come within the mutuality principle. Interest is paid by borrowers in discharge of a legal obligation to pay it; when paid it forms part of the general funds of the taxpayer to be dealt with as it thinks fit; payment by a borrower is not in any sense a pre-estimate of the amount which will be required to meet his proportion of mutual liabilities incurred on behalf of all borrowers; nor is interest paid on the footing that there will be a refund to the borrower of any part of the payment which is not required to meet mutual liabilities."
The mutuality principle and the present case
In the light of the decided cases it seems to me that there are two impediments to applying the mutuality principle to the present case. In the first place, although precise identicality between the individuals contributing to a fund and the participants in that fund is no longer required, there must be a "reasonable relationship" between contributions and benefits. Here there is no such relationship. It is not suggested that all members of the Association took space at the 1984 Australian Music Exhibition. The evidence does not reveal the number of members of the Association at that time. For all the evidence reveals, those who took space might be a small proportion of the whole. Nor is it suggested that all members who took space did so in equal quantity. As the fees which they paid were related to the space which they took, there was, in all likelihood, a considerable disproportion of "contributions" between those who did make payments. The point, of course, is that the decisions made by individual members as to the extent of their payments depended not upon any wish or need to make members' contributions to the Association but rather upon the display space which they wished to take.
Secondly, this is not a case where the moneys received by the Association in respect of the exhibition is money held on behalf of individual members. The moneys became part of the general funds of the Association, to be dealt with as the members of the Association might see fit from time to time, but without any obligation to those members who had taken space at the 1984 exhibition. Even on dissolution of the Association any surplus was not distributable amongst the members; whether the members who made "contributions" at any particular time or any other class of members. The Association's Constitution provides that any assets held at the time of the dissolution of the Association are to be given or transferred to another organisation having like objects. It is true, as counsel for the Association pointed out, that the selection of that organisation would rest with the persons who were members of the Association at that time, but that does not mean that the property to be disposed of by that selection is the property of the individual members. And, of course, there can be no assurance that any of the members who took space at the 1984 exhibition will be members at that time.
In my opinion, Purvis J fell into error in applying the 'mutuality principle' to this case. The subject $19,000 was simply an item of income earned by the Association from one of its activities in the 1985 taxation year. It matters not that the amount of the payment was affected by the extent of space taken at the exhibition by members of the Association. The receipt was money available to the Association to use for its own purposes, free of any obligation to any individual members.
The decision of the Administrative Appeals Tribunal must be set aside. As the appeal to that Tribunal must fail, as a matter of law, no good purpose would be served by remitting the matter. The appropriate course is for this Court to order that the Commissioner's decision be affirmed.
Counsel for the Commissioner informed the Court that his client had agreed to pay the Association's costs of the proceeding in this Court, irrespective of its outcome. I would order accordingly.
JUDGE3
In these proceedings the Commissioner of Taxation ("the Commissioner") appeals from a decision of the Administrative Appeals Tribunal (Purvis J) in favour of the respondent Australian Music Traders Association ("the Association"). The Association had objected to the inclusion in its assessable income for the 1984 fiscal year of an amount of $19,000. This objection had been disallowed by the Commissioner. The Association's appeal to Purvis J was successful. His Honour held, in accordance with the Association's objection, that the sum of $19,000 was not income according to the ordinary usages of mankind. In so holding, his Honour applied the "mutuality" principle. The appeal from his Honour comes directly to a Full Court of this Court: s 20(2) Federal Court of Australia Act 1976. The appeal is restricted to matters of law: s 44(1) Administrative Appeals Tribunal Act 1975.
The relevant background facts may be stated briefly. The Association was founded in 1977. It is a non-profit trade organisation, whose members are companies, firms and individuals engaged in the importation into and sale in Australia of musical instruments, records, sheet music and the like. It has a written constitution with objects which include the following:
"- to protect and promote the interests of wholesalers, importers, dealers, agents and all other persons engaged in the industry of importing, selling by wholesale and dealing by wholesale in musical instruments and their accessories, sheet music, gramaphone (sic) records, amplification equipment and the like throughout Australia.
- to organize, conduct and manage music trade fairs in Australia and elsewhere and to arrange for the exhibition at such fairs of goods dealt in by members and other goods related to the music industry."
The constitution also provides that:
"If upon the dissolution of the association there remains after satisfaction of all its debts and liabilities any property whatsoever, such property shall not be paid to or distributed among members of the Association but shall be given or transferred to some other institution or similar institutions having objects similar to the Association, such institution or institutions to be determined by the members of the Association at or before the time of dissolution."
The Association has held a trade fair each year since its foundation. Until 1985 it organised the fair itself using voluntary members' labour. During 1984, the Association decided that the seventh fair, to be held in the financial year ending June 1985 should be organised by a professional organiser. It selected for this purpose a company, Exhibition and Trade Fairs Pty Limited ("the organiser"). On 8 May 1984 an agreement was entered into for the running of the 1985 trade fair. The fair was to be conducted as previously, with exhibitors paying fees for space allotted to them in an exhibition building rented by the Association for the duration of the fair. The exhibitors, as previously, were to include members of the Association.
It appears that, in previous years, the revenue received by the Association from its members for the renting of exhibition floor space was accepted by the Commissioner as being subject to the mutuality principle and therefore not required to be included in the Association's assessable income. Indeed, it appears that the Association was accepted as a taxpayer to whom the mutuality principle applied, with the result that the annual subscriptions of its members were not regarded as income. The Association was taxed only on profits received from trading activities with non-members. It appears to have been treated as though it were an ordinary members' club.
The introduction of the organiser produced an alteration in the attitude of the Commissioner to receipts by the Association having their origin in payments by members for exhibition floor space. It is necessary to consider, in this regard, certain provisions of the written agreement between the Association and the organiser. Clause 1 provided that the Association as "Sponsor", appointed Exhibitions and Trade Fairs Pty Limited, to organise, stage and manage for the next three years the exhibition known as the Australian Music Exhibition. Provision was made (inter alia) for the organiser "to open a bank account in a name to be determined by the parties where will be deposited all money received by the organisers from exhibition space sales and that unless agreed by the Sponsor, the funds will be used firstly to discharge the Sponsor's liability for rental, cleaning and electrical costs (if any) relating to the Exhibition to the Venue". The bank account was to be operated jointly by the parties. It appears to have been established before the commencement of the agreement. I agree with Purvis J that nothing appears to hinge upon that fact.
By clause 4 it was provided that:-
"The Organisers shall be liable for all debts incurred in connection with the organisation, staging and management of the Exhibition and agree to promptly pay all such debts as and when they fall due. The Organisers shall not represent or otherwise suggest to any person that the Organisers are Agents or employees of or have the backing or support of the Sponsor, financial or otherwise, in respect of any contract or order for the supply of goods or services, lease, application for credit or other agreement or transaction whatsoever. The Organisers agree to indemnify and hold the Sponsor harmless from and against any and all claims, responsibilities and damages and any costs or expenses that may be sustained by the Sponsor in connection with the organisation, staging and management of the Exhibition by the Organiser or of a default by the Organiser in the aforesaid obligations."
The remuneration of the organiser was provided for by clause 6 as follows:
"In consideration of this agreement and the appointment in clause 1 hereof the Sponsor shall be entitled to receive out of the moneys contributed by its members to the Exhibition an amount calculated in accordance with the following formula:
(a) FOR THE EXHIBITION YEAR 1984 $13,000.00 plus $1,000.00 for every 100 square metres of floor space sold in excess of 1800 square metres up to and including 2400 square metres;"
It was further provided: "The Sponsor shall be entitled to withdraw the said amounts of members contributions in accordance with clause 6 within fourteen (14) days of the end of each exhibition."
In evidence before the tribunal it was made clear that this clause was intended to "assure that the Association received the funds it was relying on to continue work for members and that this should come from members' booking for the trade fair". It was "written into the agreement in order that it might be clear that the money to be received by the association was only to come out of the moneys paid to the organiser by members".
There were forty-eight exhibitors at the 1985 trade fair. Twenty nine of them were members of the Association. The amount of floor space taken up by members ensured that the ceiling figure of $19,000 became payable to the Association pursuant to clause 6. It was in respect of this figure that mutuality was claimed, the claim being made on the same basis as in previous years, namely that it consisted of contributions made by members to the Association's "mutual" funds. The claim was rejected by the Commissioner on the basis that the receipt must be treated as an ordinary trading receipt received in the course of the Association's business.
The way in which the matter was argued before the Tribunal appears in the judgment of Purvis J. Apart from submissions addressed on the basis of the provision of the Association's constitution, set out above, dealing with the disposal of the Association's assets upon its dissolution, the Commissioner's arguments appear to have depended upon the change in financial arrangements resulting from the interposition of and agreement with the organiser. These submissions and the findings of Purvis J in relation to them are set out in his reasons as follows:
"The respondent further submitted that the amount of $19,000 paid to the taxpayer by the organizer was paid pursuant to an agreement to which the members of the Association were not parties. Hence no mutuality. It was said that the doctrine of privity of contract applied and that accordingly, the payment made by the organizer could not be said to be from funds obtained out of moneys paid by members. The factual evidence was otherwise. It is quite apparent that by reason of the agreement between the Association and the organizer, and the agreement between the member and the organizer, reciting as it does the involvement of the Association, that the payment made by the member calculated on a floor space basis is directly related to the payment made by the organizer to the Association, likewise based on a floor space basis.
It was further contended on behalf of the respondent that no part of the $19,000 paid to the Association pursuant to the agreement 'constituted payments of subscriptions by members'. Hence no mutuality. However, it is clear on the evidence that the means utilized whereby members made payment to the Association by way of the organizer was one of convenience to the Association and the organizer and not otherwise. It was clearly envisaged that the organizer would be making a payment to the Association proportionate to space taken by members and out of the 'contributions' made by such members. Whether by 'subscription' or 'contribution', the money came from members. It was further said that the subject amount was paid to the Association pursuant to an agreement with a non-member of the Association, the organizer, and accordingly, an amount derived from sources outside the Association. I do not accept this to have been so, The Association, being one entitled to enter into an agreement pursuant to its Constitution by its authorized officers, agreed on behalf of its members that payment would be made to it by the organizer out of contributions paid to the organizer by members. The necessary nexus is clearly established."
Purvis J went on to find "that the payments made by members of the Association to the organiser out of which moneys the organiser, pursuant to the agreement, made payment to the sponsor, the Association, such moneys then to be retained by the sponsor and used by it in furtherance of its objects, was money advanced by the members for a common purpose."
He accordingly held that the principle of mutuality applied in the circumstances. "The moneys received by the Association were so received as a consequence of moneys having been advanced by members and were paid out of a fund into which such moneys had been placed. The fact that the moneys paid by members to the organiser might have been intermixed with other moneys received by the organiser from non-members does not preclude this conclusion being available".
Purvis J also rejected the Commissioner's argument that, because the constitution of the Association provided that, upon its dissolution, surplus funds would not be returned to the members but be "given or transferred to some other institution or institutions having objects similar to the object of the Association...to be determined by the members of the Association", the mutuality principle could not apply to the Association. He held that any such surplus would be owned by the members of the Association and wholly controlled by them with the result that the disposition of the funds was solely a matter for them. In such circumstances he held that the mutuality principle applied.
This latter argument, if successful, would, apparently, result in the Association's being excluded from the benefits of the mutuality principle even if it organised the trade fair itself, as in previous years. It would also mean that the fund resulting from its subscription revenue would lose the protection of the principle.
So far as I can gather, this latter submission was the only submission made by the Commissioner which put in issue the application of the mutuality principle to the Association other than as resulting from the arrangements made with the organiser for the 1985 trade fair. Before this court, however, submissions were put on a wider basis. It was argued that mutuality was denied in respect of the receipt of the $19,000 on bases that would have similarly denied it if the fees for floor space had been paid directly by the exhibiting members to the Association. It was put, as I understand it, that the evidence did not establish the existence of any relevant common fund into which the moneys were to be paid and in respect of which there was not shown to be any "reasonable relationship between what a member contributes and what he may be expected or entitled to receive from the fund" (per Mason J in Sydney Waterboard Employees' Credit Union Limited v Commissioner of Taxation (1973) 129 CLR 446 at 457).
I experienced some concern about these submissions as they do not appear to have been made before the Tribunal and, if made, might well have led to the calling of additional evidence. It would certainly appear that additional evidence could have been called to give a more complete picture of the Association's finances and also of the proportion of its members who were exhibitors at the fair. In the result, however, I have felt no need to pursue these concerns in these reasons as I am satisfied that the Tribunal's decision should be upheld on the evidence as it stands.
It is clear that Purvis J considered that the moneys paid by the Association's members for the hire of exhibition floor space were intended to and did in fact find their way back into the general funds of the Association. The passage cited from his reasons makes this quite clear. Although the $19,000 was paid by the organiser to the Association, it was clearly regarded by both the payer and the payee as being paid from funds received by the payer from the Association's own members. The maintenance of a separate account by the organiser for moneys received from the Association's members might have made this more obvious but was not, in my view, in any way necessary. It was a perfectly simple matter to determine what amounts were received from the Association's own members for the hire of floor space, to total these amounts and to pay them over, as was done, to the Association. It was plainly never intended that this portion of the receipts from the trade fair should be retained by the organiser; it was always intended that they should be passed on to the Association. Such was clearly the finding of Purvis J. In my opinion the finding was one of fact. No question of law arose.
Was Purvis J, nevertheless, required as a matter of law to find that the moneys when so received by the Association fell outside the mutuality principle? If the facts of the case inevitably attracted the reasoning of the judgments in Sydney Waterboard Employees' Credit Union Limited v Commissioner of Taxation (1973) 129 CLR 446, then it could, no doubt, be said that, as a matter of law, Purvis J should have held that the mutuality principle did not apply. In my view, however, this cannot be so held. Quite clearly that case and similar cases such as Revesby Credit Union Co-operative Limited v Commissioner of Taxation (1965) 112 CLR 564 and Social Credit Savings and Loans Society Limited v Commissioner of Taxation (1971) 125 CLR 560 do not purport to lay down in a definitive and comprehensive fashion all the circumstances in which the doctrine of mutuality may be held to apply. They are cases dealing with associations which have very particular financial arrangements with their members. They borrow money from members and on-lend it to other members. Not all borrowers are lenders; not all lenders are borrowers. In such circumstances the difficulty of determining what is a common fund for the purpose of the application of the doctrine is demonstrable as is the difficulty of ascertaining what members can be properly described as common participants in the benefits of the fund.
In my view, however, Purvis J was not constrained by these cases to hold that the $19,000 was not received by the Association as part of its mutual funds. It was perfectly open to him to regard the Association as being analogous to a members' club rather than to a money lending co-operative. That a relevant distinction exists between these two types of institution is apparent from the judgment of Gibbs J in the Social Credit Savings case where his Honour says at p 573:-
"It is obvious enough that in the case of a club not all of the members will necessarily take advantage of all the facilities which the members own in common but it has held that this does not prevent the mutuality principle from applying. In National Association of Local Government Officers v Watkins (H.M. Inspector of Taxes)
(1934) 18 TC 499, the association, a trade union which was unincorporated - a fact regarded as of fundamental importance (at p 503) - purchased a holiday camp which was vested in trustees for the use and benefit of the members of the association. The profits arising from the camp enured for the benefit of the members of the association as a whole and not of the camp users only and it was submitted on behalf of the Revenue that for this reason the case did not fall within the mutuality principle. This argument was rejected by Finlay J, who considered that the camp was the property of the members themselves and that so far as it was used by the members no profit could accrue from its user (at p 506)."
His Honour had previously referred to the mutuality principle in these terms (at p 570):-
"In England it has been held that where a number of people, associated together for a common purpose, have contributed to a common fund in which all the contributors are interested, the surplus of their contributions remaining after the fund has been applied to the common purpose 'is in essence a return of their own moneys which they have overpaid and is not a profit' (Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604 at pp 618-619). This principle has found particular application in the cases of mutual insurance funds and members' clubs."
In a general review of the law, his Honour also referred to the frequently quoted passage from the speech of Lord Cave in Jones v South-West Lancashire Coal Owners' Association Ltd (1927) AC 827 at 832 where his Lordship said:
"In this case, as in the New York Life Insurance Co's Case (1889) 14 App Cas 381, there are no shareholders interested, and the whole of the yearly surplus remains to the credit of the members, and must either be applied to meeting their future claims or be returned to them on retirement. Sooner or later, in meal or in malt, the whole of the company's receipts must go back to the policy holders as a class, though not precisely in the proportions in which they have contributed to them; and the association does not in any true sense make a profit out of their contributions."
In my view, this passage may clearly be applied to the circumstances of the present case. Once it be accepted that the amount of $19,000 can be regarded as, in fact, merely a total of payments made to the Association by a number of its members for a service provided to them by the Association within its constitution, then those payments can properly be seen merely to form part of the general funds of the Association available to be applied for the benefit of the members.
It is to be noted that Gibbs J in the Social Credit Savings and Loans case recognised the continuing authority of National Association of Local Government Officers v Watkins (H.M. Inspector of Taxes) in the passage already cited, notwithstanding that he declined to regard the case he was deciding as being "governed by the decision" in that case. I find it appropriate to set out some relevant passages from the decision of Finlay J in Watkins. His Honour said at p 503:-
"...there is this Association, the National Association of Local Government Officers. It is an unincorporated association, and I think that is a matter of fundamental importance. The result, of course, is that the Association is in the position of a club. The property belongs to the members, and it is a fallacy, as has been pointed out in several cases, one at least of which was cited to me, to say in the case of such a club that, where a member orders a dinner and consumes it, there is any sale to him. There is not a sale. The fundamental thing is that the whole property is vested in the members."
His Honour went on to indicate that the Association had purchased an existing holiday camp to provide cheap holiday facilities for its members. The facilities of the camp were also made available to non-members in the relevant year as "it was doubted whether enough members would go to the camp to fill it". His Honour indicated (at p 504) that the substantial question which he had "to consider is whether the true view is that the profits ought to be confined to profits made from affording facilities at this camp to non-members or whether the sums received from members can be regarded as profits". After considering a number of authorities Finlay J went on to say (at p 505):-
"The substance of the argument of the Solicitor- General in the present case appeared to me to be this: he said that this, in a sense, is a club, but it is very different from the ordinary case of a club. Anyhow, as regards this particular activity, the supplying of the holiday camp, he said that that cannot fall within the club principle or mutual principle, because the subscribers to it are only a certain number of members, whereas the participants are the whole of the members. That appears to me to lie at the root of his argument. The substance of his argument was this. Here is this Association; it is, qua this particular activity, carrying on a profitable trade, and it does not matter that part of the sums it receives is derived from members. He said, as indeed he was bound to say, that if the whole business had been done with members, if the members alone, as for aught I know may now be the case, filled the camp, none the less the principle would be the same. I cannot think that that is a correct way of looking at the matter. It may be that where you have a separate entity, where you have a company, in a great many cases the test is that you have to look at the subscribers, look at the participants, and see if they are the same. Here, it seems to me to lie at the root of the thing that the property was not the property of the Association; it was the property of the members themselves, and in a case such as that, I think it is impossible - at least, so it seems to me, with the utmost deference - to apply the Solicitor-General's principle. I cannot think that you can, in the case of a club, isolate the dining room, the library, or the other various facilities which are offered by the club. The truth of the matter is, I think, that the members own the whole. The members have a right to participate in the whole. Some members will participate in some things. Some members will participate in other things, but to no members can there truly be a sale. There is, I think, no trade among members. They cannot trade with themselves. It is upon that ground, I am afraid very imperfectly expressed, but which is fundamental and lies at the root of the thing, that I think that, so far as this camp was used by the members, no profit could accrue from its user. No profit could accrue, any more than profit could accrue from any particular thing done, from the management, say, of the dining room of an ordinary club."
I cannot envisage that there would have been any difference in this decision, if the association, instead of purchasing the camp, had utilised members' funds to lease it on a regular basis for the purpose of sub-letting the facilities to members who wished to use them.
As I have indicated earlier, the present case is, in my view, far more analogous to Watkins case than to the cases upon which the Commissioner relies. There is no money lending operation with the concomitant creation of a fund of interest which can be viewed, as it were, in isolation from other funds of the taxpayer organisation so that the receipts into that fund can be regarded as trading income rather than mutual receipts. It appears plain in the present case that, apart from subscription revenue, the Association depended for its financial viability upon the annual receipt of moneys from its members who participated in the trade fair. Even if all members did not so participate, the moneys paid by those that did could properly be regarded as in the same position as moneys paid by members of a club who chose to use the facilities of the club, such as its dining room, being a facility available to all members although utilised only by some. In any event, it was an approach which, in my view, was fully open to Purvis J. It cannot be said that he has erred in law in adopting it.
There remains the question whether Purvis J erred in law in not holding that the constitutional provisions set out above as to the disposal of surplus funds on dissolution prevented the operation of the mutuality principle. His Honour held that it did not for the reason that the disposal of the funds remained within the control of the members. There appears to be no authority on this subject. None was cited to us. I think the matter is self evident and that the approach of Purvis J was clearly correct. I note that Professor R.W. Parsons in Income Taxation in Australia (1985 ed.) states at p 41 para 2.59 that "where a club's rules provide for a distribution on winding up which will not involve a benefit to members - for example, by payment to a charity, the operation of mutuality is not affected". I consider, with respect, that this is a correct statement of the position. Accordingly no error, in this regard, has been demonstrated in the decision under review.
In my opinion the appeal should be dismissed with costs.
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