Friendly Society Dispensaries
20.38. Until 1947, the income of a friendly society dispensary was exempt from income tax in the same manner as all other income of a friendly society, as outlined in paragraphs 20.22–20.23. With the introduction of Federal legislation to provide pharmaceutical benefits, under which friendly society dispensaries were allowed to dispense pharmaceutical products for the general public, the question of taxing the income of friendly society dispensaries was considered. In 1952 the Spooner Committee recommended that the taxable income of a friendly society dispensary be deemed to be 10 per cent of:
- (a) amounts received from the Australian Government under the Pharmaceutical Benefits Act and special charges prescribed by that Act in respect of the supply of pharmaceutical benefits;
- (b) amounts received from the Australian Government under the National Health Act in respect of the supply of medicines, etc. to pensioners; and
- (c) proceeds of the sale or supply of medicines and other goods to persons who are not members of a friendly society.
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20.39. The recommendation of the Spooner Committee was not adopted. In 1955, however, the present legislation was introduced. Under this a friendly society dispensary is liable to income tax at the concessional rate of 37½ per cent on taxable income exceeding $416, calculated as 10 per cent of:
- (a) amounts received by it from the Australian Government under the National Health Act 1953 in respect of the supply of pharmaceutical benefits; and
- (b) the gross proceeds received by it from the sale or supply of medicines and other goods sold or supplied in the ordinary course of business, not including amounts received from a friendly society for the supply of benefits to the members of that friendly society.
This legislation differs from the recommendations of the Spooner Committee in taxing all receipts from members. In 1961, the Ligertwood Committee proposed a basis of assessment of friendly societies which broadly followed the recommendation of the Spooner Committee.
20.40. Submissions have been received from representatives of private pharmacists maintaining that unfair competitive advantages are enjoyed by friendly society dispensaries and that these should be removed. On the other hand, representatives of friendly society dispensaries have complained of being taxed on receipts from members. They also claim that the 10 per cent measure of profit in relation to other dispensary receipts should be reduced to take account of falling profit margins in the pharmaceutical trade since the legislation was enacted in 1955.
20.41. Earlier in this chapter the Committee has considered the basis of taxation of non-profit associations and societies formed for particular purposes. The general basis recommended is that those associations and societies now exempt should be exempt from tax only on business income arising from activities directly related to the carrying out of the purpose for which they were established and which is the justification for their exemption. Income from other business operations should be assessable subject to the application, where appropriate, of the mutuality principle.
20.42. It would follow from this basis of taxation that a friendly society should not enjoy a general exemption from tax on profits from the dispensing of medicines. Where medicines are supplied to members of the society, however, the mutuality principle should apply so as to preclude any profits arising being treated as income. To the extent that the law denies this application of the mutuality principle, a friendly society is denied the tax treatment enjoyed by other mutual associations. There appears to be no basis for distinguishing the supply of liquor by a club to its members from the supply of medicines by a friendly society to its members.
20.43. It follows, in the Committee's view, that the law should adopt the principles of assessment suggested by the Spooner Committee. Accordingly, the Committee recommends that friendly society dispensaries be assessed to tax on the net profit attributable to:
- (a) amounts received from the Australian Government under the National Health Act for the supply of pharmaceutical benefits and any charges paid by members or by non-members for the supply of those benefits; and
- (b) the proceeds of the sale or supply of pharmaceutical products, not coming under the pharmaceutical
benefits scheme, and other goods to persons who are not members of the friendly society or societies
conducting the pharmacy.
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These proposals would exclude from the taxable receipts of the friendly society dispensary, receipts from members for the supply of medicines not subject to pharmaceutical benefits, receipts from members for other goods and receipts from a friendly society for the supply of benefits to the members of that friendly society. It is necessary to include in the receipts subject to tax any amount received from members for medicines supplied which are subject to pharmaceutical benefits, because of the difficulty of apportioning the profit from the supply between the payment received from the Australian Government and the payment received from the member. However, to include any other receipts from members would be a significant departure from the mutuality principle.
20.44. If it is considered that all friendly society dispensaries are in a position to supply figures of profit attributable to the taxable receipts outlined in the previous paragraph, such figures should be the basis of assessment. If this is not thought feasible, a percentage should be applied to those taxable receipts, the percentage being the approximate average net profit of private pharmacists conducting this type of business. If a percentage is to be applied, the present figure of 10 per cent should be reviewed to test whether it is appropriate at the present time.
20.45. On this recommended basis of assessment, friendly society dispensaries should be subject to tax at the normal rates for non-profit companies, that is at 42½ per cent on the first $10,000 of taxable income and at 45 per cent on the remainder. The Committee assumes that because of the narrowing of the base proposed, the increase in the rate of tax will not, generally, increase the amount of tax paid by individual friendly societies.