BAC 4644

MUTUAL CONCERNS

Question 1
a)

What do you understand by the term mutuality? How is the mutuality

principle applied or not applied in Malaysia in respect of mutual activities of
trade associations? Quote relevant cases in support of your answer.

The principle of mutuality states that a man cannot make a profit by trading with
himself. Hence, any contributions or subscriptions by its members are exempt from
tax in the hands of the club. Any surplus of contributions over expenditure is not
income.
Social Credit Savings and Loan Society Ltd v FCT [1972]
Where a number of people associated together for a common purpose, have
contributed to a common fund in which all the contributors are interest, the
surplus of their contributions remaining after the fund has been applied to
the common purpose, is in essence a return of their own money which they
have overpaid and is not a profit.
Municipal Mutual Insurance Ltd v Hills [1932]
The cardinal requirement is that all the contributors to the common fund
must be entitled to participate in the surplus and that all the participator in
the surplus must be contributors to the common fund; in other words, there
must be complete identity between the contributors and the participator. If
this requirement is satisfied, the particular form which the association takes
is immaterial.
In summary, for the principle of mutuality to apply, the crucial test is that the
contributors to the common fund must be participator in the surplus and vice versa.
It follows that the surplus of the club is not taxable where the surplus is an excess of
the owners contributions over expenses.
Principle of mutuality only applies to dealings with members contributions or
subscriptions.

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b)

MUTUAL CONCERNS

Malaysian Handbag Manufacturers Association (the association) represents

the members in the industry and was registered in the year 2003 with the
stated objective of promoting the interest of the members. The resident
association had prepared its accounts for the year ended 31 December 2012
which showed the following income and expenses.

Income
Member's subscription fees
Entrance fee
Professional fees
Seminar fees
Bank fixed deposit interest

RM

Less: Expenditure
Administrative expenses
Office maintenance
Traveling expenses
Salary and wages
Legal and professional expenses
Rental of seminar hall
Speaker fees
Depreciation
Surplus over income

Notes:
1

22,100
3,250
4,550
87,750
3,900
14,950
19,500
5,200

RM
217,750
19,500
9,750
63,700
6,500
317,200

161,200
156,000

The auditors have confirmed that the association is entitled to a capital

allowance of RM 19,500 on the office equipment for the year of assessment
2012.
The legal and professional expenses are fully incurred for the income from
professional fee.
The interest income is derived from a fixed deposit placed with a local bank.
Administrative expenses consist of telephone, fax and postage charges.
Traveling expenses are incurred by the staff in the course of carrying on their
official duties.
The income from professional fees arises from the associations activity.

2
3
4
5
6

Required:
Compute the income tax liability of the association for the year of assessment
2012.

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MUTUAL CONCERNS

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