The Commissioner of Inland Revenue (CIR) is rethinking how it taxes not-for-profit clubs and societies, particularly around the legal concept of mutuality. Historically, “mutuality” meant that certain payments from members—like annual subscriptions—were not treated as taxable income, because they were pooled for a common purpose and could be returned to members. However, a 2004 Australian court case narrowed this interpretation, saying mutuality doesn’t apply if funds can’t be returned to members. Inland Revenue now wants to align with that approach.
The CIR exercising the Power to Turn Water into Whine
Inland Revenue Consultation on Not-for-profits
On 24 February 2025, Inland Revenue published a policy consultation document: Taxation and the not-for-profit sector an officials’ issue paper; with submissions closing on 31 March 2025. Chapter 4 considers integrity and simplification issues such as not-for-profit member transactions, tax simplification, and minimisation of compliance costs. All with a view to guard against tax avoidance, tax evasion and the provision of a simple tax system for the not-for-profit sector.
Hot on the heels of that closing date, it published an undated Exposure Draft – For Comment and Discussion Only which discussed mutual transactions of associations (including clubs and societies). The exposure draft appears to have been written with a view to amending our tax law to acknowledge and follow an Australian Federal Appellate Court judgment from 2004.
Central to the judgment is an analysis and interpretation of the application of the judicial concept of “mutuality” as stated by the High Court of Australia in a taxation case of 1918. In 1918, the court considered the facts where a social club that was not-for-profit received subscriptions from its members to pay club costs.
It was adjudged that the subscriptions received were capital contributions for a common purpose which the club members expected would be fully spent in the membership year that payment is made. Any money not spent is savings which could be returned to members.
This process of pooling resources for a mutual benefit which may be returned to contributors’ pro-rata is the common law concept of “mutuality”. Accordingly, the payments were not income to the club and therefore were not assessable as income for tax purposes.
The 2004 Australian Case That Changed the Rules
The brief facts of the 2004 case, simply stated, concern an irrigation co-operative where members of a co-operative contribute an annual levy to construct, own, and maintain irrigation infrastructure. The levy consists of two parts, being an ordinary contribution to run the co-operative on a cost recovery basis for the supply of water to members and a contribution to a sinking fund for future work. After a time, for risk management purposes the co-operative would continue as a trading co-operative and form a second non-trading co-operative owned by the first co-operative.
The second co-operative would maintain the infrastructure or undertake further infrastructure works and hold the sinking fund for such works. This would separate any trading risk of the first co-operative from the non-trading risks of maintaining or constructing infrastructure by the second co-operative and protect the sinking fund from any trading risk.
This change in the structuring meant that the “mutual” members contribute to the first co-operative which then provides funding to the second co-operative. It is the first co-operative that is the contributor to the second co-operative. This may be a case of the law of unintended consequences at work as the court found that the mutual members had no claim to funds held by the second co-operative as they were not the direct contributor. Further, as the rules of the non-trading co-operative and the state legislation governing co-operatives, dated 1992, provide that surplus funds held by a non-trading co-operative could not be returned to the non-contributory members. Their benefit of “mutuality” was lost. Having lost “mutuality”, the levy contributions to the sinking fund held by the non-trading co-operative was assessable as income to that co-operative.
The Mutual Association Provisions
It is against that background that the Exposure Draft discusses its central point being the tax treatment of interactions between clubs and associations and their members and whether “mutuality” can apply.
There are four sections of the Income Tax Act 2007 described as “the mutual association provisions”. Being set in statute, they override the common law concept of “mutuality” however their application is not entirely clear. In the Exposure Draft, if your club sells you food that mutual transaction represents income to the club. Your payment of the annual subscription fee is not income to the club, this is not entirely clear in the mutuality provisions so that outcome is down to how the Commissioner interprets the application of those provisions, at the time that they are interpreted.
At paragraph 22 of the Exposure Draft I it reads: “The application of the mutual association provisions, and their implications for clubs, societies and other mutual associations, have not been made clear in material published by Inland Revenue.”
Until now, from 1978 it has been the position that for subscriptions or membership fees that are a condition of membership and not the provision of services “the mutual association provisions” do not apply, and the payment is not income to the payee. Somewhat clear. Then, in 1993 a Tax Information Bulletin states the position that clubs and societies are not accessible on member transactions and some non-member transaction including sale of food and beverages and raffle takings, with the effect that some transactions are assessable and some are not assessable. Not simple.
It would appear that for the sake of clarity and simplicity, the Commissioner has now withdrawn all prior statements and the Clubs or societies return guide 2025 – IR 9G will be updated to state that “mutuality” will have limited application due to the “mutual association provisions” and will not apply to a club or a society that cannot distribute to members, following the Australian case.
Implications for Clubs, Societies, and Community Groups
By way of example, the new Incorporated Societies Act 2022 prohibits a Society from making distributions to members. That prohibition must be echoed in the Constitution of the society. If we follow the Australian case, the concept of “mutuality” does not apply to clubs or societies interactions with members if their contribution cannot be returned to them. Unless submission on the Issues Paper and the Exposure Draft convince the Commissioner otherwise, we should expect that from 1 April 2026 membership subscriptions and fees that cannot be distributed back to members are assessable income to a club or society.
That would make the Commissioner’s position very clear and simple. Everything is assessable.