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

Members
contribution

Association

Members
activities

Mutuality

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:
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BAC4644

MUTUAL CONCERNS

Subscription fees (say)

Less:
Proportion of common expenses
(note 1)
Proportion of capital allowances
(note 2)
Exempted income

Note 1:

10,000

3,000
1,000

4,000
6,000

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 2012
RM

Member's subscription fees

Portion of common
Less
expense
Adjusted income
Less
Portion of CA
Statutory income (exempted)

217,750.00
82,453.00
135,297.00
13,666.32

121,630.68

Entrance fee

19,500

Portion of common
Less
expense
Adjusted income
Less
Portion of CA
Statutory income

7,383.89
12,116.11
1,223.85

10,892.26

Professional fees
Less
Less

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121,630.68

9,750.00
Legal and professional
expenses
Portion of common
expense

3,900.00
3,691.95

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10,892.26

BAC4644

MUTUAL CONCERNS

Adjusted income
Less
Portion of CA
Statutory income

2,158.05
611.92

1,546.13

Seminar fees
Less

63,700.00
Rental of seminar
hall
Speaker fees
Portion of common expense

14,950.00
19,500.00

Less
24,120.71
Adjusted income
5,129.29
Less
Portion of CA
3,997.91
Statutory income
1,131.38
Aggregate of statutory income from business
Less
amount of SI exempted ( subscription fee)
Aggregate of statutory income from business after exemption
Other non business income
Bank fixed deposit interest
Aggregate/ total income

Tax payable

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1,546.13

First 20,000
Next 699.77 * 7%

475.00
4.88
479.88

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1131.4
135,200.45
121,630.68
13,569.77

6,500.00
20,069.77

BAC4644

MUTUAL CONCERNS

Working 1
Gross business
income

Common Expenses
Administrative expenses
Office maintenance
Traveling expenses
Salary and wages

22,100
3,250
4,550
87,750
117,650

Member's subscription fees

Entrance fee
Professional fees
Seminar fees

Apportion to:
Member's subscription fees
117,650 * 217,750/ 310,700
Entrance fee
117,650 *
19,500 /310,700
Professional fees
117,650 *
9750/ 310,700
Seminar fees
117,650 *
63700/ 310,700

82,453.45
7,383.89
3,691.95
24,120.71
117,650.00

Working 2
Common CA

19,500

Apportion to:
Member's subscription fees
19,500 *
217,750/
Entrance fee
19,500 *
19,500
Professional fees
19,500 *
9750/
Seminar fees
19,500 *
63700/

310,700

13,666.32

/310,700

1,223.85

310,700

611.92

310,700

3,997.91
19,500.00

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217,750
19,500
9,750
63,700
310,700

BAC4644

MUTUAL CONCERNS

Answer 2
Income
Rental of societys badminton court to non-members
Less: Maintenance expense ( * 2,000)

RM

Interest on fixed deposit

Chargeable income

RM
6,500
500
6,000
4,800
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
Add: Non-allowable expenses:
Leave passage
Depreciation
Donation
Entertainment
Provision of staff gratuity (8-3)
Lease charges on car (50-43-10)
Less:
Interest income
Rental income
Adjusted income from business
Add: other sources of income
Interest income
Rental income
Total income

248,200
6,000
34,000
15,000
8,000
5,000
3,000
80,000
60,000
80,000
60,000

71,000
(140,000)
179,200
140,000
319,200

Less: Section 65A(a) deduction

Lower of 81,000 or [25% x RM 248,200]

(62,050)

Section 65A (b) deduction

8% x (RM 1,050,000 RM 100,000)
Chargeable income

(76,000)
181,150

Tax payable
1st RM 150,000
Next RM 31,150 @ 23 %

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18,700.00
7,164.50
25,864.50

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BAC4644

MUTUAL CONCERNS

(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 members 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 cooperative 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.

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