Mutual associations and the mutuality principle

2010 amendment to the Income Tax Act covering mutual associations and the common law principle of mutuality.

Sections CB 33 of the Income Tax Act 2007 Act has been amended retrospectively to ensure it overrides the common law principle of mutuality in the same manner as its corresponding provision in the Income Tax Act 2004 (section HF 1(1)).

Section DV 19 of the 2007 Act has been amended retrospectively to ensure that an association may deduct an association rebate paid to members to the same extent as was allowed under the corresponding provision in the 2004 Act (section HF 1(2)).

Section CB 33 of the 2007 Act contained an unintended change in that it did not override the principle of mutuality in the same manner as its corresponding provision in the 2004 Act (section HF 1(1)).

The principle of mutuality arises under common law. The Courts consider that a person cannot derive taxable income from mutual transactions, as a mutual transaction is of a similar nature to trading with oneself. Section CB 33 has been amended to ensure that it overrides the common law principle of mutuality for any amount derived that would otherwise be income under the Act.

A "mutual association" is allowed a deduction, under section DV 19 of the 2007 Act, for a distribution to its members of net taxable profits (termed "an association rebate"). Section DV 19 of the 2007 Act contains an unintended change in outcome that results in a smaller deduction than was allowed under its corresponding provision in the 2004 Act (section HF 1(2)).

Section DV 19 has been amended to restore the effect of section HF 1(2) of the 2004 Act. The amendment ensures that the amount of the deduction for the association rebate is no greater than the part of the association's net income that arises from certain types of transactions made between the association and its members.