The ATO has been in a generous mood for early payers in recent times
Since March 2022, the Australian Taxation Office (ATO) have been automatically crediting interest to entities who pay income tax liabilities more than 14 days before the due date.
Interest on Early Payments (IEP) is now automatically credited by the ATO when an entity makes full payment of certain tax liabilites more than two weeks before the due date. From a strata point of view, the main tax liablity that applies is income tax. It is only the payment of a tax assessment (ie: lodged tax return) that qualifies for IEP which means that PAYG instalments (prepayments of income tax) and any payments above the assessed amount do not earn IEP. Other tax types common in the strata sector such as Goods & Services Tax (GST) and PAYG WH (tax on employee wages) do not qualify.
Whilst this 'carrot' rather than 'stick' approach is a welcome change, it's important to note that the deriving of IEP by a strata body is assessable for tax purposes and, as with any Australian company, the earning of $1 or more of such income in any given tax year (July to June) necessitates the preparation of a company tax return. Circumstances therefore do exist whereby IEP actually works to a strata company's financial disadvantage. Namely where:
- IEP is the only assessable income received by the strata body in a financial year; and
- the amount of IEP received is less than the cost of the required tax return.
Most recipients of IEP will not fall into this category. The fact that they have tax to pay early in the first place indicates that they were deriving assessable income already in the prior year. In such circumstances though, it may actually work to the strata body's favour to hold off on payment until close to the ATO's stated due date for the strata (usually 15 May). Seek professional advice if you have concerns.
An Avoidable Scenario:
As most strata managers are nowadays aware, income received for the provision of status certificates is assessable and this remains the fact even in the typical event that the income is offset completely by a similar fee paid to the strata manager. Although it still requires a tax return to be prepared, the nature of the process usually results in nil tax to pay.
We often see scenarios however where there is a timing difference between the income (received from a prospective buyer via their settlement agent / conveyancer) and the expense (paid to the strata manager). If the two components straddle a financial year end (ie: income before EOFY, expense after EOFY) then the strata company will be liable for tax for that particular tax year*.
The incurring of potentialy avoidable tax is likely to be headache enough... but if the liability is then paid before it's due date, IEP can potentially result in a tax return being required in the following year as well!
Both elements of this 'double -whammy' of otherwise avoidable tax AND a following year tax return fee can be avoided by a well organised strata manager. The key is to align and reconcile status certificate income and status certificate expenses in the books of their strata clients. With this in mind, Ascend suggest that every manager explore the following process improvements:
- Charge and date your status certificate preparation fees at the same time as the income is recorded. Alternatively, charge them in bulk at the end of each month based upon the income showing in your clients' books.
- Carry out a quick reconciliation in June / July to ensure that status certicicate income / expenses align across the tax financial year in the books of your clients. In addition to avoiding tax, this often picks up missed fees owed to the strata company before it is too late.
- Perform a similar process to the previous point as part of your strata year end financials (ie: compare status certificate income with expenses)
* The expense can claimed as an expense against other assessable income in the following year but cannot simply result in a refund unless there is other income to offset it against.
Quick Takes:
- The ATO has begun automatically paying interest on early income tax payments.
- Such income is assessable for tax purposes and needs to be declared in a return.
- Strata managers should endeavour to align their fees for status certificate preparation to the same month in which the income is received (recorded) in the accounts.
For more information, please contact the Ascend office via your strata manager.
Links:
- ATO Website: Interest on Early Payments
- Do We Have to Do a Tax Return for Status Certificate Fees?
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.
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