- Mutual income (ie: that received from proprietors) is largely excluded from taxation under the principle of mutuality. Examples include levies, interest on arrears and laundry income received from owner occupiers.
- Income from assets which the strata title body owns in its own right, otherwise known as 'personal property' (eg: cash and removeable property such as washing machines, driers and gardening equipment) is taxed in the strata title body's name. Examples include interest on investment accounts, status certificate fees (received from non-owners) and laundry money from a washing machine (received from non-owners). Expenses relating to such income are deductible to the strata company.
- Income from common property is taxable in the hands of the individual owners in line with their unit entitlement percentages. This remains the case even when there is no physical distribution of cash to the owners from the strata company. Like income from personal property, expenses relating to income from common property are deductible (again in line with owners' unit entitlement percentages).
- Where a strata title body makes a physical distribution of funds to proprietors, the income tax position varies dependant upon the circumstances. Broadly speaking:
- Where any surplus contributions are returned to proprietors, such surpluses are not assessable income to proprietors.
- Where the distributed funds represent profits from outside sources (i.e. from non-proprietors), the distribution is taxable to the proprietors and may be franked by the strata title body under the imputation system (ie: similar to a franked dividend).
- Where the funds are a distribution of income from common property, the funds are taxable in the hands of proprietors when the strata company receives the money (refer point 3 above). Owners of strata companies in this particular scenario should therefore be careful not to duplicate declare this income in their own returns a second time upon receipt.
Changes in Interpretation
In short, Taxation Ruling TR 2015/3 does not alter the ATO's view of how strata title bodies are taxed, aside from some specific changes that are summarised as follows:
- In Example 1 of of the Tax Ruling, penalties received from a proprietor and imposed by a statutory tribunal (e.g. for breaching a by-law) are not considered to be mutual income. In other words, they are required to be declared in a strata company tax return at the end of the financial year. Interest on arrears however, retains it's mutual nature under the new ruling.
- TR 2015/3 outlines that the Commissioner will exercise his discretion to treat a strata title body as a public company where the scheme is "..in substantial compliance with its obligations and responsibilities as set out in the applicable legislation”. Minor breaches therefore should not result in the strata company being exposed to Division 7A (for example), which broadly relates to an owner's use of property belonging to the strata company. *
- Under the Draft Ruling TR 2015/D3 (as well as the previous ruling IT 2505), the ATO referred to the various State and Territory Strata Acts as the means to determine who were the legal and beneficial owners of common property (and therefore who should declare income received from such assets in a tax return). This resulted in common property “being vested in the body corporate as trustee for the proprietors…” in South Australia, Tasmania and the Northern Territory, resulting in costly red tape for many strata title bodies that were subsequently required to lodge a trust tax return (often in addition to a company tax return) to distribute the income to the owners. Taxation Ruling TR 2015/3 brings these three juristictions into line with the rest of the country and simplifies the treatment of income derived from common property as being assessable directly in the owners' names in line with their respective unit entitlement percentages.
A full copy of the ruling has been added to our Resource Library.
* Please note this particular provision applies from 25 November 2015 whilst the remainder of TR 2015/3 applies retrospectively.
The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above. Please contact our office for more information.