Tax ruling on societies

Press, 21 April 1979, Page 4

Tax ruling on societies

Bank interest on funds of an incorporated society was taxable income, subject to one exception, Mr Justice Casey has ruled in a reserved decision given in the Supreme Court on a case stated. His Honour’s ruling arose from an objection by the Travel Agents’ Association New Zealand (Incorporated) to a decision by the Commissioner of Inland Revenue that the association was liable to pay income tax on the bank interest on its funds.

Mr R. E. Harding appeared for the Travel Agents’ Association, and Mr N. W. Williamson for the Commissioner. His Honour ruled that the bank interest of the association was assessable income and that it was not exempt from income tax.

In his decision his Honour said that the case stated under section 32 of the Land and Income Tax Act, 1954, concerned the liability for income tax of an incorporated society in respect of bank interest on its funds.

The association objected to the Commissioner’s assessment of tax on bank interest on the basis that it was a mutual society and, accordingly, neither its receipts nor its surplus of revenue over expenditure was income in its hands.

The Commissioner contended that the income assessed was produced by transactions between the society and “outsiders” and was therefore assessable even though the objection was a mutual society. Because its surplus funds or assets may be distributed to members on winding up, the exemption of up to $5OO in section 86 of the Land and Income Tax did not apply. Mr Harding conceded that point, so the only question before the Court was the effect of the “mutual” character of the society. The constitution and rules of the society indicated that it existed to protect and promote the mutual interest of its members and that its funds were to be applied for that purpose, his Honour said. From the accounts it appeared that the interest forming the subject of this case occrued from the investment of surplus funds received from subscriptions until they were needed in the course of the association’s normal activities. In that respect it appeared similar to numerous social or trade associations which existed for the mutual benefit of their members, without any intention that they should make an independent financial gain or profit. During the years in ques-

tion, the Land and Income Tax Act, 1954, was in force, and section 88 provided that the assessable income of any person for the purposes of the Act should be deemed to include all interest, dividends, annuities and pensions.

In Carlisle and Silloth Golf Club v. Smith the House of Lords in 1913 had to deal with very similar arguments to those put forward by Mr Harding in the case of an unincorporated golf club, which in addition to receiving subscriptions from its own members, obtained a substantial sum in green fees from visitors. Those moneys went towards the maintenance of the golf course and to that extent helped to keep members’ subscriptions down. Cozens-Hardy, M.R., had said: “It seems to me that there is a real difference between moneys received from members and applied for the benefit of members and moneys received by the club from ” strangers. I cannot draw any distinction between gate moneys, which might be, and I believe sometimes are, received by a golf club and green moneys. In each case the club would be. assessable.”

Lord Macnaughten held in 1892 that a person was chargeable for income tax “not

on what saves his pocket but on what goes into his pocket.” | Accordingly, the fact that 1 the receipts simply went to, save an increase" in members’ subscriptions was irrelevant; similarly in this case, the fact that the interest earrusd might go towards the normal expenses of the association did not prevent it from being income.

Mr Williamson relied on that case and on the 1932: case of Municipal Mutual Insurance, Ltd, v. Hills which supported the proposition that a surplus from receipts arising from transactions with “outsiders” was assessable income liable to tax, whereas a surplus resulting solely from contributions made by members was not.

Once a mutual society entered into transactions persons who were not members it was no longer acting within the circle of mutuality and any amount it derived from those outside sources might be assessable income liable to taxation.

His Honour held that bank interest of the Travel Agents’ Association was assessable income because it was the result of transactions with “outsiders” and that it was not exempt from income tax.

The commissioner was awarded costs of $125.