The vast majority of strata managers we work with are very aware of when a strata company needs to prepare a tax return and what is required to be included (ie: interest income from banks, status certificate income, laundry receipts etc). On occasions though, a councillor may request further justification as to 'Why?'
To assist our clients who find themselves in such scenarios, we've compiled the most common questions we receive on the matter with summary answers for quick reference below:
How are Strata Companies Taxed?
A strata company is treated as a public company for income tax purposes. This basically means that a strata company is required to prepare a company tax return for any tax year (1 July to 30 June) in which $1 or more of assessable income is earned. It is worth noting that it is the earning of assessable income, as opposed to the making of a taxable profit that necessitates a tax return. In other words, even if a strata company spends more than it earns in terms of taxable income, it will still be required to prepare an annual return if it earns income of $1 or more in a single tax year.
What is Assessable Income for a Strata Company?
In 2004, it was held in a court decision (the ‘Villa Edgewater Case’) that a strata company carries on an enterprise (ie: business) when it levies owners and carries out maintenance on common property. As it is operating a business, the default position is that all income of a strata company is considered assessable for income tax purposes unless an area of tax law renders it not to be so.
Thankfully though, the Australian Taxation Office (ATO) has long held that the principle of mutuality applies to strata companies. The principle of mutuality simply means that one cannot make a profit out of oneself. Put simply - the ATO accepts that amounts paid by owners to the strata company is effectively just the owners paying themselves. Mutual receipts are non-assessable for tax purposes and therefore it is only income received from non-owners that needs to be considered for a strata company tax return.
It is important to also note what asset is deriving the income to determine who (ie: the strata company or the owners) is required to declare the income in a tax return. Strata companies own:
- their funds (ie cash);
- any assets that have been purchased over time using those funds; and
- their documented records (which can be charged for when provided to external parties under Section 107(3) of the STA 1985).
Common property on the other hand, belongs to the owners themselves. Therefore, any income received for the leasing of common property, whilst it is assessable income, is not considered to be income of the strata company. This remains the case even if the strata company does not pay the funds out to the owners.
So to answer the question of what constitutes assessable income for a strata company: It is all income received from non-owners for the use of the strata company’s assets (ie: cash, records, assets purchased by the strata company). The main examples are: interest received from banks, receipts from potential buyers for status certificates and laundry receipts when the strata has purchased equipment that it charges for the use of. Each of these income types qualify as assessable income and must be declared in a company tax return if they total $1 or more in a single tax year.
The above advice is taken directly from Taxation Ruling 2015/3 (TR 2015/3). Being a ‘ruling’, TR 2015/3 expresses the ATO’s interpretation of the law and is binding upon all taxpayers. It is a thorough document that provides detailed explanation and we encourage you to read it if you require clarification on specific matters or queries. A copy can be found on the Resources Library page of our website.
How Much Tax does a Strata Company Pay?
A strata company must declare all of it’s assessable income each year. It may also be entitled to deductions for some expenses (in whole or in part) such as tax return preparation and management fees. The net result of ‘Assessable Income’ less ‘Deductions’ is called the strata company’s ‘Taxable income’. Tax is levied on taxable income at the company tax rate (30%) unless the strata company is considered a base rate entity (ie: where 80% or less of it’s assessable income is sourced from passive sources such as bank interest) in which case the rate will be slightly lower for years after the 2016-17 financial year.
What does a Strata Company Have to Do to Comply with it's Tax Obligations?
As strata companies are treated as public companies for income tax purposes, they are required to lodge an annual company tax return each year declaring any assessable income earned during the previous financial year and to pay the outstanding balance of tax (if any) before the applicable due date. The due date varies depending upon the strata company’s lodgement history and can be anywhere from 31 October (ie: 4 months after the financial year end) through to 5 June the following year.
In order to lodge a tax return, a strata company requires a tax file number (TFN) but not necessarily an ABN (although an ABN is recommended by our office for all strata companies).
In order to obtain a TFN, a strata company must provide the personal details (full name, date of birth and personal TFN) of its current public officer. Having a public officer is a legal requirement of every company (strata or otherwise) under Section 252 of the Income Tax Assessment Act 1936. It is essentially the individual who is held responsible for the company’s compliance with tax and other laws and their details must be kept up to date on the ATO’s records for the company’s TFN. In the event of ongoing and deliberate non-compliance of the law by the company, the public officer can, on rare occasions, be held personally liable for the penalties of the company concerned.
Who is Responsible for Ensuring the Public Officer Position is Kept Filled?
Section 252 of the Income Tax Assessment Act 1936 clearly outlines that any company that does not keep the position of public officer filled (and the details up to date with the ATO) may be liable to fines that accumulate daily for each day that the position is left vacant.
As those charged with the governance of the Strata Company, it is the members of the current Council of Owners of a strata company that share joint and severable responsibility for keeping the position of public officer filled and the ATO records up to date with the details of the individual concerned.
Other Considerations
- A strata company cannot be treated as a not-for-profit body for tax purposes as one requirement is that it must not be able to distribute surplus funds to owners. The STA 1985 sets out in legislation that surplus funds must be distributed to owners upon windup and, therefore, even the passing of a by-law preventing distributions cannot satisfy this requirement. See our article, Strata Titles and Not-For-Profit Status, for further information.
- As a strata company is treated as a public company, it must still submit a Non-Lodgement Advice to the ATO for any year in which it earns less than $1 of assessable income in order to fulfil it’s tax obligations before the applicable tax return due date in order to remain compliant.
For more information, please contact the Ascend office via your strata manager.
Links:
- Section 252 of the Income Tax Assessment Act 1936
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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