COLEAMBALLY IRRIGATION MUTUAL CO-OPERATIVE LTD v FC of T

Judges:
Beaumont J
Merkel J
Hely J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2004] FCAFC 250

Judgment date: 7 September 2004

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Beaumont, Merkel and Hely JJ

The appellant (``CIMCL'') appealed to the primary judge against an appellable objection decision of the respondent (``the Commissioner'') disallowing CIMCL's objection against a private ruling made by the Commissioner in relation to the years of income ended 30 June 2001 - 30 June 2004 inclusive. Insofar as is relevant for present purposes, the ruling was that the sinking fund contributions paid or payable to CIMCL by its members are ordinary income of CIMCL and therefore included in CIMCL's assessable income under s 6-5 of the Income Tax Assessment Act 1997 (Cth) (``the Act'') in the year of income during which the contributions are received. By the ruling the Commissioner rejected CIMCL's claim that the contributions fell within the mutuality principle, and were therefore not income of CIMCL according to ordinary concepts and consequently were not assessable income of CIMCL under s 6-5 of the Act.

2. The primary judge dismissed CIMCL's appeal (see:
Coleambally Irrigation Mutual Co- Operative Ltd v FC of T 2004 ATC 4126; [2004] FCA 2) on the basis that Rule 75 of CIMCL's Rules prohibited the distribution of any surplus to members of CIMCL on its winding up or dissolution. Accordingly, his Honour found that the ``complete identity'' required between the contributors to the sinking fund and the participants in any surplus (including identity as a class, rather than individual identity) was precluded by Rule 75. His Honour also concluded that, but for that lack of identity brought about by Rule 75, the contributions received by CIMCL from its members would be entitled to the benefit of the mutuality principle and would not be assessable income of CIMCL.

3. CIMCL has appealed to the Full Court against the decision of the primary judge. The Commissioner has filed a Notice of Contention that there were grounds, in addition to Rule 75, that resulted in the contributions not falling within the mutuality principle.

Background

4. Coleambally Irrigation Co-Operative Ltd (``CICL'') owned the infrastructure of the irrigation scheme at Coleambally in New South Wales. The infrastructure comprised some 2,800 structures consisting of earthen channels, concrete structures such as regulators, bridges, culverts and siphons as well as pumps, meters and monitoring equipment. CICL, which was a trading co-operative under the Co-operatives Act 1992 (NSW) (``the Co-operatives Act'', was also responsible for the water supply operations. The supply operations involved CICL using the infrastructure to deliver irrigation water at the farm gate of the local irrigators participating in the irrigation scheme. The separate functions and the membership of CIMCL and CICL are described in the following paragraphs, which have been taken from the judgment of the primary judge (see:
Coleambally Irrigation Mutual Co-operative Ltd v FC of T 2004 ATC 4126 at 4128-4129 [ 6]-[12]; [2004] FCA 2 at [6]-[12]):

``6. On 21 January 2000 CIMCL was established and registered as a non trading co-operative under the Co-operatives Act. The purpose of establishing CIMCL was to divorce irrigation infrastructure and a sinking fund from financial risk arising out of CICL's trading. The rules of CICL and CIMCL made membership of the one entity conditional on membership of the other. Membership of the two co-operatives are identical save that CICL is a member of CIMCL. All irrigators are thus shareholders and members of CICL and CIMCL. Should an irrigator sell his or her farm, normally the vendor would transfer the shares and corresponding water entitlements in CICL to the purchaser, the vendor's membership of CIMCL would be terminated and the purchaser would be admitted as a new member of CIMCL.

7. CIMCL was established to construct, own and maintain all new irrigation infrastructure assets in the Coleambally district. It was to be financed by a sinking fund levy (`SFL') being contributions imposed on its irrigator members. CIMCL was to be responsible for all major future maintenance and capital works of irrigation infrastructure in the district. Any irrigation asset which it

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constructed or replaced utilising the sinking fund was to be owned by CIMCL. A consequence was that over time the majority and perhaps all of the infrastructure assets employed in the irrigation scheme would be owned by CIMCL. They would, however, be used by CICL in its water supply operations.

8. The rules of CIMCL state the objects of the co-operative to be to replace and refurbish Coleambally irrigation infrastructure for the benefit of members and to provide future funding for timely replacement and refurbishment of Coleambally irrigation infrastructure.

9. In addition to the water supply levies that irrigators are required to pay to CICL, they are also required to pay SFL contributions to CIMCL. These are calculated on the basis of the number of shares and corresponding nominal entitlement that the member has in CICL. In determining contributions the Board of CIMCL is required to cover costs, expenses and overheads of CIMCL carrying out its primary activities, including costs of repairs, refurbishment, maintenance and infrastructure construction, establishing reserves sufficient to meet anticipated expenses and liabilities of CIMCL in the future including a sinking fund to cover capital expenditure for the construction, refurbishment and replacement of future or existing irrigation assets in the areas of operation of CICL.

10. A service agreement was entered into between CICL and CIMCL whereby the SFL contributions payable to CIMCL were to be collected from the members of CICL on behalf of CIMCL and remitted to CIMCL. The first annual SFL contribution was paid by CICL members in the 2000-2001 income tax year. It is projected that the accumulated balance in the sinking fund would be $10.32 million by 2009 and $28.43 million by 2019. The sinking fund is dealt with separately in the accounts of CIMCL and does not include contributions from any non-members. It is invested and the income earned on investment is accepted by CIMCL to be income and is not the subject of the ruling.

11. An infrastructure services agreement was also entered into between CICL and CIMCL. Under this agreement CICL provides CIMCL with an annual asset maintenance and refurbishment proposal for CIMCL's approval including a schedule of works to be undertaken to bring each of the relevant assets to an acceptable state of repair and maintenance. CIMCL may, but is not required to, implement the proposal and the works referred to in it. CIMCL may, but is not required to, construct new infrastructure assets. The agreement is not exclusive and CIMCL may contract with third parties for the purpose of maintaining assets and refurbishment.

12. Whilst some maintenance and capital works could be expected to be undertaken each year by CIMCL it is anticipated that the first major expenditure spike for CIMCL will occur in approximately 15-20 years. It is expected that there would be a massive expenditure spike in approximately 40-60 years. CICL's irrigation infrastructure had a replacement value as at 30 June 2000 of $104 million. The average age of irrigation assets is 40 years with an expected design life of 60 to 100 years depending on the type of asset. It is for this reason that the majority of the infrastructure replacement expend- iture is expected to be required in the next 20 to 40 years.''

The Co-operatives Act

5. The objects of the Co-operatives Act include the promotion of co-operative philosophy, principles, practices and objectives: s 3(b). The co-operative principles are as set out in s 6 of that Act. They include:

``Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co- operative. They usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing the co- operative, possibly by setting up reserves, which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.''

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6. A co-operative may be either a trading co- operative (as is CICL), or a non-trading co- operative (as is CIMCL): s 13(2). A trading co- operative must have a share capital, and is a co- operative which gives returns or distributions on surplus or share capital: s 14. A non- trading co-operative must not give returns or distributions on surplus or share capital to members other than the nominal value of shares (if any) at winding up: s 15.

7. Section 106 of the Co-operatives Act provides that:

``(1) The rules of a co-operative have the effect of a contract under seal:

• (a) between the co-operative and each member; and
• (b) between the co-operative and its director, the principal executive officer and the secretary of the co-operative; and
• (c) between a member and each other member.

(2) Under the contract, each of those persons agrees to observe and perform the provisions of the rules as in force for the time being so far as those provisions are applicable to that person.''

8. The rules of a co-operative must set out or otherwise make provision for the matters specified in Schedule 1 of the Co-Operative Act and may contain other provisions not inconsistent with the Act or the Regulations: s 107. Schedule 1 cl 3 is as follows:

``Additional matters - non-trading co- operatives

In addition to the matters specified in clauses 1 and 2, the rules of a non-trading co-operative must provide:

• (1) that there must be no return or distribution on surplus or share capital to members other than the nominal value of shares (if any) at winding up, and
• (2) for the manner of distribution of the surplus property at winding up.''

CIMCL's Rules

9. Clause 6 of the Rules of CIMCL sets out CIMCL's objects. They include the following:

``(a) to replace and refurbish Coleambally Irrigation Infrastructure for the benefit of members;

(b) to protect the Coleambally Irrigation Infrastructure by providing financial security and a separate legal structure for the Sinking Fund and the assets acquired with the Sinking Fund;

(c) to annually bill members and collect the Sinking Fund Levy;

...

(e) to develop and implement a business plan and investment strategy that manages risk and sets financial investment objectives which provide future funding for the timely replacement of Coleambally Irrigation Infrastructure;...''

(In the Rules CIMCL is referred to as ``the Mutual'')

10. Rule 20 provides for contributions by members, including the contributions to the sinking fund that are in issue in the present appeal. The Rule provides:

``20 Contributions

20.1 The Board may determine Contributions due from applicants for membership and members of the Co- operative.

20.2 The Board must in June of each Year determine the Contributions due from each member and notify members of that determination.

20.3 The Contributions due from each member, other than CICL, shall be calculated on the basis of the number of shares and Corresponding Nominal Entitlements that member has in CICL.

20.4 In determining Contributions for a Year the Board must calculate Contributions so as to cover costs and expenses and overheads of the Mutual in carrying out its primary activities, including, but not limited to:

• (a) costs of repairs, refurbishment, maintenance and construction in relation to the assets of the Mutual;
• (b) amounts sufficient to allow accumulation of reserves at rates sufficient to meet anticipated expenses and liabilities of the Mutual in future Years including:
  • (i) a fund to be known as the `Sinking Fund' to cover capital expenditure for the construction, refurbishment and replacement of future irrigation assets

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    in the Existing Area of Operations of CICL; and
  • (ii) such other reserves as the Mutual may from time to time determine are prudent and reasonable to permit the Mutual to carry out its objects.''

11. Rule 21 requires the Board to cause separate accounts to be kept for the reserves established under Rule 20.4(b). Monies to the credit of the reserves may only be utilised for the purposes stated (in respect of each particular reserve) in Rule 20.4(b).

12. Article 71 deals with the co-operative funds. It includes the following:

``71.1 The income and property of the Mutual however derived shall be applied solely towards the promotion of the objects of the Mutual and no portion thereof shall be paid or transferred directly or indirectly by way of discount, rebate or otherwise by way of profit to the members of the Mutual.

...

71.3 Any surplus resulting from the Mutual's operation during a financial year, after providing for depreciation in the value of the Mutual's property or for contingent liability for loss, shall be applied to carrying out the Mutual's objects.

71.4 An amount not exceeding five percent of the surplus may be applied to any charitable purpose, or for promoting co- operation or any community advancement project.''

13. Rule 75 provides that the winding up of the mutual shall be in accordance with Part 12 of the Co-operatives Act. Rule 75.2 provides as follows:

``If on the winding up or dissolution of the Mutual there remains after the satisfaction of all its debts and liabilities any property, this shall not be paid or distributed amongst the members of the Mutual but shall be given or transferred to an institution:-

• (a) which has objects similar to those of the Mutual;
• (b) whose constitution prohibits the distribution of its property among its members;
• (c) which has been chosen by the members of the Mutual at or before the time of dissolution or in default thereof by the Chief Judge of such Court as may have or acquire jurisdiction in the matter.''

The decision of the primary judge

14. The primary judge stated the relevant mutuality principle (
Coleambally Irrigation Mutual Co-Operative Ltd v FC of T 2004 ATC 4126 at 4132-4133 [32]-[34]; [2004] FCA 2 at [ 32]-[34]):

``32. It seems to be essential to the application of mutuality that the monies contributed are and remain `in substance' the monies of the contributors: cf per Mason J, with whom Barwick CJ, Menzies, Walsh and Stephen JJ agreed in
Sydney Water Board Employees Credit Union v FC of T 73 ATC 4129 at 4134-4135; (1973) 129 CLR 446 at 456. In the simple case of the members' unincorporated club the monies belong to the members in the normal sense of that expression. If the monies are not expended the members will have the right to have them returned to them. It is clear, however, that the word `belong' as used in the above proposition is not used in its normal sense. In the case of an incorporated club the monies of the incorporated club will belong in law to the incorporated club itself, yet that will not deny mutuality for in substance the assets of the incorporated club can be seen to belong to its members.

33. It is said also to be essential to mutuality that there be a complete identity between the contributors and the participators, at least as a class. So, as was said by Upjohn J in
Faulconbridge (Inspector of Taxes) v National Employers Mutual General Association Ltd (1952) 33 TC 103 at 125:

`... at any given moment of time the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgment, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in their place in the future.'

34. In the Social Credit Savings and Loans Society case it was held that a lending body which made loans to members at a rate of interest and was entitled to apply its surplus in paying benefits to employees, to provide interest rebates to borrowing members and subject thereto for distribution to all members, whether or not they borrowed,

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was not entitled to be regarded as subject to the doctrine of mutuality. This was because there was lacking the requirement of identicality between the contributors to the common fund and the participators in it. The common fund there was the payments of interest and the borrowers, therefore, the contributors. Many members were not borrowers, however. Further, the surplus (even after an amendment was made to the rules in an attempt to have the taxpayer comply with the mutuality principle by ensuring that any surplus could not be paid to members who did not borrow) could be paid to employees or the whole of the members. Gibbs J was of the view that the fact that the whole surplus could be paid to employees meant that there was not identity between the contributors and the possible participators. In other words the surplus did not belong to the contributors. See too
Revesby Credit Union Co-operative Ltd v FC of T (1965) 112 CLR 564.''

15. Applying those principles his Honour stated (at ATC 4134 [41]; FCA [41]):

``41. It is not suggested in the present case that CIMCL received the contributions impressed with a trust that it apply the contributions solely for the purpose of repair, replacement or acquisition of irrigation infrastructure and subject thereto, that contributions be held for the benefit of contributors or their successors in title. CIMCL is bound in contract to expend the monies it receives for the purposes for which it was established. But the terms of that contract, contained as it is in the constituent documents of CIMCL as a non trading co-operative, contemplate that the members might wind the co-operative up and Article 75 then deals with what is to happen to surplus funds. The fact that those surplus funds are forbidden to be distributed to members but must be distributed to others, has the consequence, it seems to me, that it is impossible to say that CIMCL is an entity to which contributions are made by its members and where those contributions remain the property of the members in the sense that expression is used in the cases as including a class of members. In the relevant sense the contributions do not `belong' to the members. This is but another way of saying that it is impossible to say of CIMCL that there is the requisite `complete identity' between the contributors and the participants (including identity as a class, rather than individual identity) where Article 75 would permit, indeed, require on a winding up that surplus funds be distributed otherwise than to members.''

Our reasoning on the appeal

16. Section 6-5 of the Act provides that ``assessable income'' includes income according to ordinary concepts. Whether a receipt is income depends upon its quality in the hands of the recipient:
Scott v FC of T (1966) 14 ATD 286 at 293; (1966) 117 CLR 514 at 526;
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413 at 4419; (1990) 170 CLR 124 at 136.

17. CIMCL is a body corporate distinct from its members: the Co-operative Act s 29. It is common ground that the sinking fund levy contributions paid to CIMCL by its members (``the contributions'') are not impressed with any trust. It is also common ground that the contributions would be assessable income of CIMCL unless the mutuality principle operates so as to produce a different result. The Act does not expressly refer to a mutuality principle, hence it is important to ascertain whether there is such a principle, and if so, what it is, and how it bears upon the question whether the contributions are part of CIMCL's assessable income.

18. In
Sydney Water Board Employees Credit Union v FC of T 73 ATC 4129; (1973) 129 CLR 446 Barwick CJ said (at ATC 4131; CLR 450) that the description ``mutuality principle'', is used, unfortunately in his Honour's opinion, to express the reason for the conclusion that the return to a taxpayer of a share of the surplus of a fund to which the taxpayer has contributed with others, after the fund has been used for a purpose agreed between the contributors, is not income. What distinguishes the amount refunded in such circumstances from profit or income is that the payment is made out of monies which are in substance the monies of the contributors. Similarly, Mason J (with whose judgment Menzies, Walsh and Stephen JJ agreed) said (at ATC 4133; CLR 454) that according to the mutuality principle, when a group of persons subscribe to a common fund for a common purpose, a return to the contributors of surplus contributions, that is, money in excess of what is required for the

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common purpose, does not constitute assessable income in their hands. A refund to contributors of part of their own money which they had overpaid is not 'income' in the hands of the recipients in the ordinary sense of that word.

19. The present case is not concerned with a refund of overpaid contributions to the contributors. The question here is a different one. It is whether the contributions made by members to CIMCL are income in the hands of CIMCL. There is at least the appearance of gain by CIMCL from its receipt of the contributions having regard to the separate legal personality of the contributors, on the one hand, and CIMCL on the other. But if the mutuality principle applies, its effect is to deny an income quality to an item which would, in other respects, have that quality:
Social Credit Savings & Loans Society Ltd v FC of T 71 ATC 4232 at 4238; (1971) 125 CLR 560 at 571; RW Parsons, Income Taxation in Australia, LBC, Sydney, 1985 at [2.51].

20. The authorities establish that the mutuality principle is not confined in its operation to the situation in which the surplus contributions made by a contributor to a common fund are returned to the contributor. In
The Bohemians Club v Acting Federal Commissioner of Taxation (1918) 24 CLR 334 the receipt by a social club of annual subscriptions from its members was held not to be income of the club even though, for tax purposes, the club was a separate entity from its members. Griffith CJ held (at 337) that the contributions were, in substance, advances of capital for a common purpose which were expected to be exhausted in the year in which they were paid. They were not income of the club any more than calls made by members of the company upon their shares are income of the company.

21. In
North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293; (2002) 121 FCR 1, the Full Court (Spender, Finn and Merkel JJ) said that it is (at ATC 4302; FCR 13) ``well enough established'' that the mutuality principle, in addition to applying to refunds of contributions made to a common fund, may also apply to contributions made and distributions received where the persons who associate for a common purpose and contribute to a common fund have incorporated to effectuate their common purpose, provided the company can properly be treated as an entity for their convenience. In such cases, the fact of incorporation is irrelevant:
Revesby Credit Union Co-operative Ltd v FC of T (1965) 13 ATD 449 at 453; (1964-1965) 112 CLR 564 at 574.

22. However, the mutuality principle is dependent upon the existence of an ``identity'' between contributors to the fund and those who are entitled to participate in it. The identity required is not an identity between individuals, but an identity between classes, and all that is required is a reasonable relationship between what a member contributes, and the member's expected participation in the common fund: Sydney Water Board Employees Credit Union (supra) at ATC 4135; CLR 457; Social Credit Savings & Loans Society Ltd (supra) at ATC 4238-4239; CLR 571-572. For the mutuality principle to apply, in one way or another (``in meal or in malt'') the contributing members must be entitled to recoupment or refund of any surplus so that in the result the body corporate does not make a profit from them:
Jones v South-West Lancashire Coal Owners Association Ltd [1927] AC 827 at 832. In Social Credit Savings & Loans Society Ltd (supra) at ATC 4240-4241; CLR 576, Gibbs J held that a power in the Society to apply the surplus in a fund in favour of employees of the Society was sufficient to negate the proposition that the fund ``belonged'' to the contributors.

23. The sinking fund is dealt with separately in the accounts of CIMCL, as required by Rule 21. The sinking fund does not include any contributions from non-members. Monies standing to the credit of the sinking fund may only be utilised to fund capital expenditure for the construction, refurbishment and replacement of future irrigation assets within CIMCL's existing area of operations (Rules 20 and 21). Those monies do not form part of the general funds of CIMCL to be dealt with as CIMCL thinks fit. The contributions made to the sinking fund were struck on the basis of projections of future expenditure over an expected term of about 40 years. The contributions reflect a pre-estimate of the amount that will be required to be expended by CIMCL to maintain and replace infrastructure assets and thereby provide benefits to the irrigation members.

24. It is common ground that the long term nature of the sinking fund does not, of itself, have the consequence that the mutuality

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principle does not apply. Some irrigators may cease to be members of CIMCL over the life of the project, and others may become members in their place. But it is sufficient if there is an identity between contributors and participants as a class:
Faulconbridge (Inspector of Taxes) v National Employers' Mutuals General Association Ltd (1952) 33 TC 103 at 125.

25. It is clear that once a member makes a contribution to the sinking fund the member cannot get any part of it back, even if a surplus emerges. Whether a surplus will emerge may not be known for many years. Whether the contributions made to CIMCL are assessable income of CIMCL in the years of receipt cannot depend upon whether or not a surplus ultimately emerges. The question is whether in the light of CIMCL's status as a non-trading co- operative, and the provisions of its rules, and in particular Rules 71 and 75, the monies contributed to the sinking fund continue to ``belong'', in a substantive sense, to the members as contributors, with CIMCL as no more than a convenient vehicle for them to effectuate their common purpose. If all that occurs is a pooling of the contributors' funds with a complete identity between the contributors to the common fund and those entitled to participate in it, then CIMCL's receipt of the contributions will not be income of CIMCL according to ordinary concepts.

26. The private ruling records (at p 15 of the Appeal Book):

``Rules 71 and 75 further protect CIMCL from the risk of third party takeover aimed at stripping the sinking fund in a winding up or seeking to distribute funds collected for the purpose of maintaining CIMCL's assets.''

In order to achieve that protection, the Co- operative Act required that CIMCL's constitution (but, in particular Rules 71 and 75) erect an unsurmountable barrier between the members of CIMCL and CIMCL's funds which precludes a finding that in substance there is merely a pooling of members' funds with the members having an entitlement that any surplus be returned to the member contributors. CIMCL is effectively interposed between the common fund and the contributors to protect the fund against any claims, whether directly or indirectly, for the recoupment or refund of the contributions made by those contributors, or by others who may become members in their place. This is the antithesis of the mutuality principle.

27. CIMCL's constitution is such that once the contributions are made, the monies contributed can no longer be said to ``belong'' to the members, either in a formal or a substantive sense. The contributions may only be applied in the manner specified in Rule 20.4(b)(i) whilst CIMCL is a going concern, and may not be distributed amongst CIMCL's members on a winding up. The mutuality principle requires there to be a pooling of funds which can only be expended in pursuit of the common purpose, or returned to the contributors: Social Credit Savings & Loans Society Ltd (supra) at ATC 4238-4239; CLR 571-572. Rules 71 and 75 of CIMCL's constitution are such that the sinking fund does not satisfy this description. In
FC of T v Australian Music Traders Association 90 ATC 4536 Wilcox J (with whom Davies J agreed) held that a provision in the Articles of the Association similar to Rule 75 had the effect of rendering the mutuality principle inapplicable even though the selection of the body to receive the Association's assets on a winding up rested with the members of the Association.

28. Counsel for CIMCL, Mr Walker SC, submitted that even though the sinking fund was established on a basis which denied to the contributors any entitlement to a return of any surplus in the fund, the combination of the following factors is sufficient to attract the operation of the mutuality principle:

• (i) the contributions are made to CIMCL in order to achieve a common purpose;
• (ii) all of the members are liable to make contributions to the sinking fund;
• (iii) all of the members benefit from the application of the sinking fund to the repair and replacement of infrastructure assets; and
• (iv) by reason of the contract between them constituted by the Rules all of the members have participated in the choice of the manner in which CIMCL's assets are to be transferred in the event of its winding up.

29. In Mr Walker's submission Rule 75 is no different in its effect to a power vested in the members to determine that, in the event of a surplus arising on winding up, what would otherwise be the member's share is to be paid to a nominated institution. Thus, it was submitted

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the rule does not deny the members dominion over any surplus, but rather recognises it.

30. The problem with this submission is that if the amounts standing to the credit of the sinking fund truly ``belonged'' to the contributors, with CIMCL no more than a convenient vehicle, the members would have a choice as to whether any surplus would come back to the members in the event of a winding up. The denial of that choice by CIMCL's constitution demonstrates that the amounts contributed to the sinking fund do not truly belong to the member contributors. When the members make, and CIMCL receives, a contribution, the contributing members have no right to participate in any surplus of the members' contributions over what may be expended in carrying out the common purpose. Both in form and in substance the contributions ``belong'' to CIMCL and were ``income'' in the hands of CIMCL. Put simply, the Rules deny the members' dominion over any surplus, both before and after a dissolution or winding up. Of course, a different situation might arise if the Rules provided that contributions be equal to and no more than the amounts expended, with the consequence that there could not be a surplus, but that is not the situation in the present case.

31. The appellant relied upon the following statement by Professor Parsons: (Parsons (supra) at [2.59]):

``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. A provision for distribution among all those who are members at the time of winding up without regard to their contributions to that surplus would preclude the operation of mutuality.''

32. Professor Parson's statement is of no assistance to CIMCL, as he appears to be adverting to the situation where a club's rules may permit the members to determine that the payment be to a charity rather than to them. A quite different situation arises where, as in the present case, the rules require that the payment be to a third party and not to the members. Further, if mutuality is absent in the circumstances referred to in the second sentence, it must also be absent where the distribution must not be made to any of the members.

33. For these reasons we agree with the primary judge's conclusion that the sinking fund levy contributions paid or payable to CIMCL form part of CIMCL's assessable income under s 6-5 of the Act in the income year during which the contributions were received.

Notice of Contention

34. The Commissioner lodged a Notice of Contention that the judgment should be affirmed on grounds other than those relied on by the Court below. The other grounds contended for were:

``1. The sinking fund levy contributions do not fall within the mutuality principle on the grounds that:

• 1.1 they are not contributions to a common fund in which the contributors are entitled to participate as a class because the contributors may only benefit from the fund indirectly by reason of their membership of Coleambally Irrigation Co-Operative Ltd (`CICL') and pursuant to the terms of the water supply contracts between CICL and the contributors; and
• 1.2 CICL is a member of the appellant and benefits from the sinking fund but is not a contributor to the sinking fund.''

35. The matters raised in the Notice were not dealt with by the primary judge, however, this is understandable as the transcript reveals that Commissioner's counsel gave his Honour to understand in the course of submissions that the Rule 75 point was the sole point in the case. In those circumstances it is not appropriate for us to address the Notice of Contention when, in view of the conclusion that we have reached, it is not necessary for us to do so.

Conclusion

36. The appeal should be dismissed with costs.

THE COURT ORDERS THAT:

1. The appeal be dismissed with costs.