Exploring the mutuality principle in taxation for SACCOs in Kenya

The Mutuality Principle, a legal standard established through case law, plays a significant role in the taxation of Savings and Credit Cooperative Societies (SACCOs) in Kenya. This principle asserts that an organization cannot derive income from itself. When several individuals contribute to a common fund for a shared purpose, any surplus from that fund is not considered income. However, this principle does not apply to income derived from sources outside the group.
Characteristics of Organizations Accessing Mutuality
Organizations that benefit from the mutuality principle generally exhibit the following characteristics:
- They operate for the collective benefit of their members, rather than individual gain.
- Members share a common purpose and actively participate in the organization.
- Contributions are made to a common fund, which is used to achieve the common purpose.
- All contributions are utilized for the collective benefit.
- Members have ownership and control over the common fund.
- Contributors are entitled to a share of any surplus from the common fund.
Mutual Dealings and Tax Implications
Under the mutuality principle
- Receipts from Mutual Dealings
- These are not taxable as they are considered mutual receipts.
- Expenses Related to Mutual Receipts
- Such expenses are non-deductible.
However, not all dealings involving members qualify as mutual dealings. The mutuality principle does not extend to activities that resemble a trade or business.
Trade and Business Activities
In tax law, ‘business’ and ‘trade’ refer to commercial activities intended to generate profit, which are taxable. A mutual organization may be engaged in business if certain indicators are present. This business can be for a taxable purpose (producing assessable income) or a non-taxable purpose (producing mutual receipts), or both.
Dealings with Members
For an arrangement to be mutual, there must be complete identity between contributors and participants in the surplus of common funds. Members collectively contribute to and benefit from the common fund. When an organization transacts with members collectively to produce a surplus, the activity is for a non-taxable purpose and adheres to the mutuality principle.
However, mutuality ceases to apply when a member individually contributes to secure a right over the use of a collectively owned asset for personal benefit. This breaks the identity between contributors and participants, and the activity becomes a trade, subject to taxation.