When a strata company collects a fee for providing information via status certificates but then pays it straight to the manager, do they really have to do a tax return?
Unfortunately, the answer is 'Yes'
The Technical Reasons:
Under Australian Taxation Law, all companies (including strata companies) are required to submit a company tax return for any year in which assessable income of $1 or more is derived.
In terms of what is assessable, there is an exemption for any income that is considered to be ‘mutual’ – that is, income that is earned from a company’s owners in their capacity as owners. Such income is not subject to tax and does not give rise to the requirement to prepare a tax return. Levies and interest on arrears paid by owners are two prominent examples of such ‘mutual income’ in the strata sector.
It is therefore almost always income that is derived from external third parties that necessitates a tax return being prepared for a strata company. The two most common examples in strata are interest on investments (derived from a bank) and fees received by the strata for the provision of information via ‘status certificates’ (derived from prospective buyers usually via their settlement agents / conveyancers). The latter category is sometimes referred to as Section 110 income (or Section 43 income previously) in strata.
It is important to note that it is the earning of income, and not the making of a profit, that necessitates a return be prepared. This is particularly relevant in reference to status certificate income. On most occasions such certificates are prepared by the strata manager who will charge the strata company a fee for the service. Often this fee is equal to the amount that the strata company is legally allowed to charge the prospective buyer, resulting in nil net profit or loss for the strata company. Unfortunately though, the fact that the strata company does not make a profit (and therefore will likely pay no tax) does not preclude it from it’s legal obligation to prepare a tax return to declare the assessable income. This position is expressly confirmed at Item 10.2 of the compendium to the ATO’s Tax Ruling TR 2015/3 Strata Income Tax Matters.
Are There Any Ways Around This?
Consideration has been given by some strata companies to not charging prospective owners for status certificates with a view to avoid the need for a tax return to be prepared. Whilst perfectly legal, this technique will usually work to the financial detriment of the strata company as they will still need to pay the strata manager for the preparation of each certificate (keep in mind that there may be more than one in a year).
An alternative avoidance measure we have previously seen floated is for the strata manager to charge their fee directly to the prospective buyer however we have advice that this cannot be done legally. Managers do this at their own risk.
What About Prior Years?
If your strata company has previously not declared status certificate income via tax returns in prior years, we advise that you have unfortunately not been meeting your legal obligations. That being said, we do not suggest going back to prepare/amend historical returns as the tax position at least is usually the same whether a return is prepared or not. Instead, we simply recommend that returns be prepared going forward each year where necessary to ensure adherence with the law.
Other Info:
- For our Strata Manager partners, we're happy to provide you with a letter on an Ascend letterhead explaining the above for your owners. Just contact us. In addition, the information is outlined in lay terms in the e-flyers we provide (in your branding) as part of our partner program.
For more information, please contact the Ascend office via your strata manager.
Links:
- Tax Ruling 2015/3 - Compendium
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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