Timing mismatches between Status Certificate Income and related expenses can lead to unnecessary tax liabilities for strata companies, but a simple adjustment in charging practices can help avoid this issue.
What Is Status Certificate Income?
Status Certificate Income is a fee a strata company receives for providing information about a particular lot, typically to a prospective buyer or their conveyancer. The maximum amount chargeable for this certificate is set by regulations.
Under Taxation Ruling TR 2015/3, strata companies are taxed as public companies and must lodge a tax return if they earn more than $1 of assessable income in a financial year. Since Status Certificate Income is generally received from a non-owner, it is considered assessable and must be reported in the strata company’s tax return.
Deductibility of Strata Manager Fees
Strata managers usually prepare these certificates and charge a fee for the service. Often, this fee matches what the strata company charges, ensuring no financial loss to the strata. Under section 8-1 of the Income Tax Assessment Act 1997, this fee is deductible, as it directly relates to earning assessable income.
In practical terms, while the strata company must lodge a tax return, it rarely incurs taxable income (profit), provided there are no other sources of assessable income, such as bank interest. However, timing issues in recognising income and expenses can create an unnecessary tax liability.
Common Issues A: Reconciling Charges
Strata managers use different methods to charge fees for Status Certificates. Some charge their fee at the same time the strata invoice is raised, while others charge in bulk at month-end or only reconcile fees annually. Some rely solely on their software without conducting additional checks.
Regular reconciliation—at least annually—helps ensure all income is properly accounted for, reducing the risk of unbilled amounts. Without this, strata owners may question why tax is payable on amounts they have not fully accounted for.
Common Issue B: Timing of Charges Across Financial Years
A key issue is the timing of charges that straddle 30 June, as this can unintentionally lead to tax being payable without an immediate offsetting deduction.
For example:
- A Status Certificate is issued on 28 June, and the strata company records the income in that financial year.
- The manager’s fee is charged on 5 July, falling into the next financial year.
In this case, the strata company has assessable income in one financial year but does not have a corresponding deduction in that same year. While the expense is still deductible in the following year, unless the strata company has other taxable income in that year (such as bank interest), the deduction will be carried forward indefinitely as a tax loss. Effectively, this means tax is paid on the income, but no automatic refund is generated for the expense payment unless the strata company earns taxable profit in a future year—something that is unlikely unless it starts earning interest from an investment account—and the accountant has systems to adequately track the loss into the future.
Best Practice to Minimise Timing Issues:
One complicating factor is that the tax year is always 1 July to 30 June, which often does not align with the strata company’s own reporting period. This means that relying solely on a year-end review based on the strata’s financial year may not identify tax-related timing issues.
To reduce the risk of timing mismatches, the best approach is to align the date of manager fees with the date the strata company records the income. Implementing a system where charges are consistently recognised in the same month as the related income helps prevent unnecessary tax liabilities.
An annual review covering the period 1 July to 30 June serves as a useful double check. This review not only ensures that expenses align with income for tax purposes but also helps identify any unbilled amounts, preventing lost revenue for strata managers.
Fortunately, the top software platforms in the strata section, Property IQ, StrataMaster, and StrataMax, each provide functionality to review financial activity specifically for the tax year, regardless of the strata company’s own reporting period. Several other strata accounting platforms do not have this capability and the process involves a manual check of two sets of specifically dated reports. Possible - but fiddly.
An Ascend Point fo Difference:
At Ascend Strata Accountants, we recognise the importance of strata managers collecting the fees they are entitled to and avoiding unnecessary conversations with owners questioning why tax is payable when they have no apparent investment income. We actively check for status certificate timing discrepancies before finalising tax returns and advise our partnering strata managers with recommendations to address matters prior to lodgement. It helps all parties (manager, strata and accountant) alike.
Quick Takes:
- Status Certificate Income is assessable unless received from a current lot owner.
- Fees paid to strata managers for preparing certificates are deductible.
- The tax year runs 1 July to 30 June, which may differ from the strata’s reporting year.
- A best practice approach is to date manager fees in the same month as the related income and review transactions annually.
If you'd like to discuss opportunities to better monitor the way your strata management business manages it's status certificate fee process, feel free to Contact Us.
Links:
- Do We Have to Do a Tax Return for Tax Certificate Fees?
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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