Mutual Concern Answer

BAC4644 MUTUAL CONCERNS

Answer to question 1 a

The mutuality principle holds that a man cannot make a profit by trading with himself. Therefore, where a number of people have associated together for a common purpose and have contributed to a common fund in which all of the contributors are interested, the surplus of their contributions remaining after the fund has been applied to the common purpose is the return of their own moneys (which they have overpaid) and is therefore not profit. (Last v London Assurance Corporation, Social Credit Savings and Loan Society Ltd v FCT, Municipal Mutual Insurance Ltd v Hills could be quoted as authorities.)

Thus, when the mutuality principle applies, any dealings with members’ contributions or subscriptions will not give rise to a liability to tax.

Diagrammatically it can be expressed as follows:

Fig: 1

In Malaysia, trade associations are generally organisations formed with the stated objective of safeguarding and promoting further the businesses of its members and advancing the profession of its members. As only members are involved in such organisations, the principle of mutuality exists and any gains arising from their activity should not give rise to a chargeable income.

However, s.53 of the Income Tax Act 1967 effectively excludes the application of the mutuality principle by deeming a resident trade association to be carrying on a business and its gross income to be all sums receivable on revenue account, including entrance fees and subscriptions. These incomes are brought to charge.

However, some exemption is available to the associations vide Income Tax (Exemption) (No.19) Order 2005 (PU(A) 19/2005), under which members’ subscription fees, less a proportion of common expenses and common capital allowances, are exempted from income tax.

Note that the legislation does not provide for an outright exemption (i.e. a full exemption for subscription) but only a partial exemption being a proportion arrived at by disallowing certain proportion of common expenses and capital allowances. It can be represented as follows:

document.doc page 1 / 6

Association

Mutuality

Members’ contribution

Members’ activities


Subscription fees (say) 10,000Less: Proportion of common expenses (note 1) 3,000 Proportion of capital allowances (note 2) 1,000 4,000

Exempted income 6,000

Note 1: Proportion of common expenses

Common expenses x [ subscription fees / total gross business income ]

Note 2: Proportion of capital allowance

Common Capital allowance x [ subscription fees / total gross business income]

Answer to question 1b

Tax Computation of Malaysian Handbag Manufacturers Association for YA 2012RM

Member's subscription fees 217,750.00

LessPortion of common expense 82,453.00

Adjusted income 135,297.00

Less Portion of CA 13,666.32

Statutory income (exempted) 121,630.68 121,630.68

Entrance fee 19,500




Statutory income 10,892.26 10,892.26

Professional fees 9,750.00

LessLegal and professional expenses 3,900.00





Less Portion of CA 611.92

Statutory income 1,546.13 1,546.13

Seminar fees 63,700.00

LessRental of seminar hall 14,950.00Speaker fees 19,500.00

Less Portion of common expense 24,120.71



Statutory income 1,131.38 1131.4

Aggregate of statutory income from business 135,200.45

Less amount of SI exempted ( subscription fee) 121,630.68

Aggregate of statutory income from business after exemption 13,569.77

Other non business incomeBank fixed deposit interest 6,500.00 Aggregate/ total income 20,069.77

Tax payable First 20,000 475.00Next 699.77 * 7% 4.88

479.88



Working 1

Common ExpensesGross business income

Administrative expenses 22,100 Member's subscription fees 217,750Office maintenance 3,250 Entrance fee 19,500Traveling expenses 4,550 Professional fees 9,750Salary and wages 87,750 Seminar fees 63,700

117,650 310,700

Apportion to:

Member's subscription fees117,650 * 217,750/ 310,700 82,453.45

Entrance fee117,650 * 19,500 /310,700 7,383.89

Professional fees117,650 * 9750/ 310,700 3,691.95

Seminar fees117,650 * 63700/ 310,700 24,120.71

117,650.00 Working 2

Common CA 19,500

Apportion to:

Member's subscription fees19,500 * 217,750/ 310,700 13,666.32

Entrance fee19,500 * 19,500 /310,700 1,223.85

Professional fees19,500 * 9750/ 310,700 611.92

Seminar fees19,500 * 63700/ 310,700 3,997.91

19,500.00



Answer 2

Income RM RMRental of society’s badminton court to non-members 6,500 Less: Maintenance expense ( ¼ * 2,000) 500

6,000Interest on fixed deposit 4,800Chargeable income 10,800

Answer Q 3

(a) The tax payable of the Society for the year of assessment 2012 is as follows:RM RM

Excess of income over expenditure 248,200Add: Non-allowable expenses:Leave passage 6,000Depreciation 34,000Donation 15,000Entertainment 8,000Provision of staff gratuity (8-3) 5,000Lease charges on car (50-43-10) 3,000 71,000Less:

Interest income 80,000Rental income 60,000 (140,000)

Adjusted income from business 179,200Add: other sources of income

Interest income 80,000Rental income 60,000 140,000

Total income 319,200

Less: Section 65A(a) deductionLower of 81,000 or [25% x RM 248,200] (62,050)

Section 65A (b) deduction8% x (RM 1,050,000 – RM 100,000) (76,000)

Chargeable income 181,150

Tax payable1st RM 150,000 18,700.00Next RM 31,150 @ 23 % 7,164.50

25,864.50



(b) Co-operative societies are exempted from income tax:(i) On all profits they derive for the first five years from the date of

registration.(ii) After the 5 years, if they have member’s fund less than RM 750,000 at the

first day of the basis period for the year of assessment.

(c) Co-operative societies are not required to account for any dividends paid to their members pursuant to section 108(15)(a) of ITA 1967.The members are exempt from income tax on any dividends paid by the co-operative society pursuant to paragraph 12A of Schedule 6. No credit shall be given to the members for the income tax paid by the co-operative societies.


Documents

Mutual Concern Answer