There exists a little known nuance in the ATO's Tax Ruling 2015/3 that can greatly reduce the tax payable by strata companies operating a pay per use laundry facility for their residents.
This article explains how identifying the proportion of owner occupiers in a building can reduce the tax payable by the strata on laundry receipts by utilising the 'mutuality principle':
The mutuality principle, as defined by the ATO, essentially means that an entity cannot derive income from itself. For instance, if a sole trader handyman invoices themselves, this transaction is not subject to tax. Applying this principle to strata companies, the levies paid by owners to the strata company are deemed mutual income. This is because the owners collectively own the strata company and, in essence, are paying themselves.
The ATO’s Tax Ruling 2015/3 provides detailed guidance on the application of the mutuality principle to strata companies. It confirms that most contributions from owners, such as strata levies, are considered mutual income and are thus non-assessable. However, the ruling also outlines specific scenarios where the mutuality principle does not apply, resulting in tax consequences. The main example given is a fine or penalty paid by an owner for breaching a bylaw. Such payments are deemed to have been made not in their capacity as an owner but as a rule-violating resident.
Although perhaps somewhat contrary to the fine/penalty example, income from owner-occupiers for the use of laundry is quoted as a specific example that is considered to be mutual in nature, and thus non-assessable for tax purposes. This distinction may be difficult to ascertain but it's inclusion is beneficial for strata companies that operate a laundry for residents, as it reduces their taxable income.
Unfortunately, many strata managers are unaware of this ability to exclude the proportion of income contributed by owner-occupiers for tax purposes and simply disclose all laundry receipts on a tax return, regularly resulting in the strata companies they manage paying large amounts of tax unnecessarily.
At Ascend Business Accountants, we recommend a percentage allocation method to simplify the process. Here’s how we do it:
- Determine the Postal Addresses of each lot: Use the strata software (StrataMax, Property IQ, StrataMaster etc) to identify the postal addresses of lot owners. Owners using the building address for correspondence are likely owner-occupiers.
- Calculate the Proportion: For example, in a 10-lot building where 3 owners use the building address, 30% of the laundry income can be excluded as non-assessable.
- Document the Allocation: Maintain work papers that detail the percentage allocation. If 30% of the owners are identified as owner-occupiers, enter this percentage to automatically adjust the laundry income field in the company’s tax return.
Quick Takes:
- The mutuality principle exempts most income derived by strata companies from it's owners from being subject to income tax.
- Income from common facilities (such as laundry machines) used by tenants is taxable, while owner-occupier contributions are non-assessable.
- Use a percentage allocation method to quickly calculate and document non-assessable income.
For more information, please contact the Ascend office via your strata manager.
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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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