An organisation is classified a mutual where there is a complete identity between the participants in the entity and its members, and where the entity's income is derived from members.

A mutual is a self-help organisation formed by a group of individuals or businesses to provide a service to themselves. In Australia, mutuals come in many forms (trade unions, clubs, credit unions, industry superannuation funds), and are incorporated under a variety of legislation, both state and federal.

A co-operative is just one of a number of legal entities available for people and businesses to form a mutual organisation. Other entities include companies and incorporated associations.

The Australian Taxation Office estimates that there are between 200,000 and 300,000 mutuals in Australia. (Source: Federal Minister for Revenue, Mutuality Principle to be Restored, Media Release, 30 May 2005)

The mutuality principle is a legal principle established by case law. It is based on the proposition that an organisation (commonly a legal entity) cannot derive an income from itself.

The principle provides that where a group of persons contribute to a fund created and controlled for a common purpose and for the mutual benefit of its members, any surplus arising from the use of that fund for the common purpose is not assessable as income, even if distributed to the contributors.

The principle is that taxable income must be derived by outside parties (a person cannot make a profit from him/herself). Typically, the principle has relevance with the activities between the entity and its members (mutual activities), but not to activities with non members for payment (trading activities).

Credit unions are mutuals - only savers can be members, all savers must be members and income is derived from investing member deposits. Similarly, housing co-operatives are mutuals - only tenants may be members, all tenants must be members and income is derived from tenants.

Many Australian co-operatives are not mutuals because they provide services to both members and non-members. For example, a co-operative which runs a retail outlet is not a mutual if some of its customers are not members. Similarly, a health care co-operative would not be mutual if it provides health services to both member and non-member patients.

The term "demutualisation" is often used in the broader community to describe changes in corporate form. For example, a change from a co-operative to a company limited by shares is often referred to as a demutualisation.

The process of demutualisation involves a change in organisation that results in members surrendering their rights to participate in any common fund that constitutes the organisation.

Upon demutualisation, there is effectively a distribution or an allocation of any accumulated mutual surplus to members. Commonly, mutual organisations that demutualise distribute the benefit of any accumulated surplus to members by issuing shares in the demutualised entity, or an equivalent cash payment from reserves or from the proceeds of the sale of demutualised shares, in exchange for giving up their membership interests. More information