Can you get away with not charging GST on levies if they're only used for loan repayments?
We have recently sighted several examples of managers incorrectly raising levies for GST registered schemes without GST on the logic that the levies are quarantined for payment on loan repayments (which are not an expense and do not include GST. We aim to provide clarity on the matter via this article.
The Basis of GST on Strata Levies:
According to ATO Interpretive Decision 2001/650, strata companies perform various activities to administer the common property and assets for the benefit of their owners. These activities are classified as 'services' within the meaning of 'supply' under the GST framework. As such, contributions from owners, including strata levies, are deemed 'taxable supplies.' This designation requires GST to be added to these levies, which essentially means a 10% increase over the amount levied by the strata company.
GST on Loan Repayment Levies:
A common question arises regarding levies specifically raised for the repayment of loans. Even if these levies are earmarked for loan repayments, they must include GST. This stipulation holds because, regardless of the use of the funds, the act of raising levies by a GST-registered strata company is considered a supply of services to the lot owners. Hence, all levies include GST, aligning with the broader principle that the strata company's activities in managing and maintaining property are continuous supplies of service.
Explaining the Logic to Lot Owners:
While it might seem counterintuitive to charge GST on funds not directly used to purchase goods or services, this practice is in line with GST legislation. When the loan was initially drawn, no GST was applicable on the receipt of funds. However, when the strata company drew down the funds, it was presumably to procure a major project that included GST credits that the strata company would have been eligible to claim back in it's BAS at the time of payment. Essentially, the GST on the levies raised for the loan repayments, help to balance the GST credit obligations uniformly over time, preventing any financial imbalances. It's essentially a timing issue and the loan has effectively allowed for the early claiming of GST credits when the project was paid for before then recouping these amounts over time via the loan repayment levies.
To illustrate with an extreme example - if loan repayment levies were allowed to be GST free on the basis they are to fund loan repayments, we'd encourage every GST registered strata company to borrow their entire budgeted expenditure each year, collect GST free loan repayment levies and then repay the loan in full, thus obtaining a 1/11 discount on most expenditure to which they would otherwise not be entitled. Obviously that's not the case in practice which hopefully outlines the point.
Quick Takes:
- Levies raised by a GST registered strata company are considered a supply of services for GST purposes.
- GST must be added to these levies, regardless of what the funds are used for.
- The GST on levies raised for loan repayments evens out the GST credits claimed when the loan was initially drawn down and spent.
For more information, please contact the Ascend office via your strata manager.
Links:
- ATO Interpretive Decision 2001/650
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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