The ATO has issued a new draft tax ruling explaining specific income tax issues that affect strata companies and their owners.
The ATO has issued a new draft tax ruling explaining specific income tax issues that affect strata companies and their owners.
In a nutshell, the ruling consolidates the previous ruling (IT 2505) with several strata specific tax determinations* that have been issued over the years. It also provides clarification on a number of circumstances that often lead to confusion within the sector.
We have uploaded a copy of the draft ruling to the Resources page of our website. There is a lot of detailed jargon contained in the document but below is a condensed version of the key content:
Definitions
‘Strata title body’ = strata company, body corporate, owners corporation etc in the latest version of ATO-Speak.
ITAA1936 & ITA1997 refer to the two Australian Income Tax Assessment Acts.
Date of effect
The Commissioner proposes this ruling will apply both before and after its date of issue when finalised with the exception of paragraph 14 which contains a clarification of the circumstances in which the Commissioner will treat a strata title body as a public company. When the final ruling is issued, paragraph 14 will apply from the date of issue.
Status for taxation purposes
A strata title body is a company for income tax purposes but will not be taxed as a non-profit company even if it includes non-profit clauses in its by-laws. Reasoning: A strata title body cannot be prohibited from distributing funds to members due to the wording of the various state strata title body acts.
Main sources of income
Amounts contributed by owners:
- Amounts otherwise assessable to the strata title body will not be included in its assessable income where the receipts are mutual.
- Amounts levied on proprietors by a strata title are mutual receipts and therefore are not assessable to the strata title body.
- Note however that an example is given where income paid to the strata title body from an owner would be deemed to be assessable (Penalty payable to the strata company for breaching by-laws).
Income from personal property of the strata title body:
- any interest or dividend income derived by the strata title body from the investment of moneys held in its fund represents assessable income of the strata title body unless specifically exempted by ITAA1936 or ITAA1997.
- income derived from the ownership and use of other personal property owned by the strata title body is also assessable to the strata title body (eg rent charged for the use of washing machines, driers and lawnmowers).
Income from common property:
- where the common property is vested in the proprietors (or in the strata title body as agent for the proprietors), the income derived from the use of the property constitutes assessable income of the individual proprietors (WA, Vic, Tas, Qld, NSW)
- where strata title bodies hold the common property as trustee on behalf of the proprietors, moneys received from the use of the common property are derived in the capacity as trustee and are assessed in accordance with Div 6 of the ITAA 1936 (ie: Trust Income). (SA, NT, ACT)
Access fees:
- Access fees charged by the strata title body for the inspection of records are assessable income of the strata title body except where they are received from a proprietor.
Deductibility of expenses
Capital allowances (aka depreciation):
- where the strata title body holds common property (as is the case in SA, NT and ACT), it is the holder of a depreciating asset forming part of the common property.
- In WA, Vic, Tas, Qld and NSW, each proprietor is a holder of such assets in their own right… and may be entitled to a deduction for depreciation accordingly.
Capital works:
- the deductibility depends on whether the particular area is used for income earning purposes. To the extent it is, a deduction for the appropriate portion of construction expenditure may be available to the entity incurring the expenditure if they own or lease the area.
Apportionment
- Expenses related to earning both assessable income (non-mutual) and non-assessable income (mutual) need to be apportioned by using a method that is 'fair and reasonable'. The ruling suggests an exapmle formula of:
[(Non-mutual Income) / (Total Income)] x Apportionable Expenditure.
Note: This is an interesting change in interpretation as the wording in the previous ruling effectively mandated the above formula to apply… as opposed to simply suggesting it as an example. The new ruling opens the door to a little more flexibility depending upon circumstances.
Carried forward losses
If a strata title body has carried forward tax losses, these are not eaten up by mutual receipts (eg: levies) as mutual receipts are not income.
Distributions to members
As the principle of mutuality applies to proprietors’ contributions, any distributions to proprietors that are a return of surplus contributions are not assessable income. Any distributions to proprietors out of profits derived by the strata title body constitute dividends which are assessable income of the proprietors. Such distributions are able to be franked in accordance with Pt 3-6 of the ITAA 1997.
Comments
As the ruling is in draft format, the ATO are open to submissions regarding it’s content. The closing date for comments is 8 May 2015 and contact details are available as part of the draft ruling. Ascend Strata Support will be making a submission that mainly encompasses suggestions for further clarification and to query some potential typographical errors we have noted. Please feel free to forward any suggestions or opinions and we may well be able to include these on your behalf as part of our submission.
*For those who may be interested, the rulings and determinations that have been consolidated by TR2015/D1 are listed below. Each has now been withdrawn by the tax office.
- IT 2505 “Income tax: bodies corporate constituted under strata title legislation”
- TD 92/181 “Income tax: do mutual receipts form part of ‘exempt income’ in the context of general domestic current year losses and undeducted prior year losses?”
- TD 93/7 “Income tax: under what circumstances is a strata title body corporate required to lodge an income tax return?”
- TD 93/73 “Income tax: will a strata title body corporate be taxed as a non profit company if it includes non profit clauses in its by laws?”
- TD 96/22 “Income tax: does the interest payable on late levies represent assessable income of a body corporate?”
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.
(C) 2015 Ascend Strata Pty Ltd