Unlike business financials, strata companies rarely show an expense for depreciation of assets.
Why doesn't depreciation show as an expense on strata financials?
Strata owners who are familiar with business financial reports often request that the physical assets of their strata property be monitored via a fixed assets schedule. When the strata manager explains that no such schedule exists for their building, queries often arise as to why common property and other assets are not being depreciated each year as is the case with most entities. The question can often be a tricky one to answer for the strata manager.
By way of an example, let us consider a property situated on a canal or marina. An owner enquires about some jetties that were installed in the late 2000s and why they do not show as assets on the balance sheet. The correct answer can vary and depends upon whether the jetties form part of the common property or have been purchased using strata funds (ie: 'personal property' of the strata company):
- If the jetties form part of the strata plan, then they are likely to be common property. As such, they are not owned by the strata company but rather by the owners themselves. As a result, they do not appear on the strata company's balance sheet.
- In contrast, if the jetties were paid for from strata funds, then they ARE assets that belong to the strata company. In this scenario, the absence of the assets on the balance sheet is likely explained by the accounting treatment of the original purchase transaction. The strata manager at the time has likely expensed (as opposed to capitalised) the purchase, meaning that the full amount would have shown on the Income & Expenditure report at the time of the purchase as opposed to going on the balance sheet and being depreciated each year. Whilst this treatment may differ from financial reports regularly prepared for businesses, it's not necessarily 'wrong' so long as there are no external users dependant upon the information and that the reporting method meets the needs of the majority of current owners. In addition, full expenditure can make things much easier for the owners to analyse for budgeting and cashflow purposes.
Should depreciation records be retained for tax purposes though?
Levies are not assessable to the strata company due to the 'principal of mutuality' (ie: the act of an owner effectively paying themselves is not subject to tax). As a result, only income from external sources is assessable (ie: bank interest and status certificate fees). Flowing on from that, the strata can generally only claim expenses related to the assessable income under Section 8-1 of the Tax Act. To go back to our earlier example, the depreciation (or full expenditure) on jetties does not generate interest income or status certificate fees and is therefore not deductible to the strata company. As a result, depreciation on such items is not calculated or referenced in the strata's tax records.
So they aren't compulsory.. but what if the council simply want to show depreciation anyway?
A reliable current value of the jetties can be obtained from a quantity surveyor if desired. This is in fact encouraged if the majority of owners are landlords as they may be able to use depreciation in their own tax returns against rental income.
Alternatively, the council could attempt to locate the original price of assets from old financial statements and developer records if available to calculate the depreciation themselves. Whilst theoretically possible, this is not recommended due to the potential complexity of the exercise. Going back to the jetties example - If the jetties are fixed to the ground, they will likely fall under Division 43 and be subject to a 2.5% straight line rate of depreciation. If not fixed (eg: floating jetties), the useful life of jetties per the ATO is 15 years and therefore the council could apply 6.66% straight line depreciation or 13.33% diminishing value. This is just for a single asset class so you can imagine how complex this could get for a whole building with many assets.
Quick Takes:
- Depreciation on common property should not show on strata financial reports.
- Depreciation on personal property is rarely shown due to the payments being fully expensed at the time of purchase to enable easier analysis for budgeting and cashflow purposes.
- Licensed quantity surveyors can go over a strata property and assign current values to assets for depreciation purposes that are acceptable to the ATO.
For more information, please contact the Ascend office via your strata manager.
Links:
- Common Property Depreciation
- Income Tax Assessment Act 1997: Section 8.1 (General Deductions)
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.
(C) 2022 Ascend Strata Pty Ltd