The ATO has issued a draft ruling explaining specific income tax issues that affect:
- bodies corporate constituted under strata title legislation; and
- proprietors of a lot held under that legislation.
In particular, it sets out the principles that determine which entity holds property for the purposes of determining:
- the assessability of income and the deductibility of expenses; and
- how the principle of mutuality applies.
Status for taxation purposes – A strata title body is a company for income tax purposes.
- The Commissioner has a discretion to treat a company as a public company for the purposes of s 103A(5) of the ITAA 1936. This discretion will be exercised in circumstances where the strata title body is in substantial compliance with its obligations and responsibilities as set out in the applicable governing legislation.
- A strata title body will not be taxed as a non-profit company, even if it includes non-profit clauses in its by-laws.
The main sources of income
- Amounts contributed by proprietors:
- oan amount that is otherwise assessable to the strata title body will not be included in its assessable income under s 6-5 of the ITAA 1997, where the principle of mutuality applies.
- oamounts levied on proprietors by a strata title body in accordance with the state or territory Acts which form part of a fund used for the day-to-day expenses, general maintenance and repair of common property or for the establishment of special purpose funds as set out under those Acts are mutual receipts and therefore are not assessable to the strata title body.
- Income derived from the personal property of the strata title body:
- oany interest, dividends or interest income derived by the body corporate from the investment of moneys held in its fund represents assessable income of the body corporate unless specifically exempted by the ITAA 1936 or ITAA 1997
- oincome derived from the ownership and use of other personal property (eg moveable goods and chattels) owned by the strata title body is also assessable to the strata title body (eg rent charged for the use of washing machines, driers and lawnmowers).
- Common property:
- owhere the common property is vested in the proprietors or in the strata title body as agent for the proprietors, the income derived from the use of the property constitutes assessable income of the individual proprietors.
- owhere strata title bodies hold the common property as trustee on behalf of the proprietors, moneys received from the use of the common property are derived in the capacity as trustee and are assessed in accordance with Div 6 of the ITAA 1936.
- Access fees —
- ocharged by the strata title body for the inspection of records, including the books of account, all insurance policies, the strata role, the strata plan and the minutes of meetings are assessable income of the strata title body except where they are received from a proprietor.
Distributions to members –
- As the principle of mutuality applies to proprietors’ contributions, any distributions to proprietors that are a return of surplus contributions are not assessable income.
- Any distributions to proprietors out of profits derived by the strata title body constitute dividends which are assessable income of the proprietors under s 44(1) of the ITAA 1936 and are able to be franked in accordance with Pt 3-6 of the ITAA 1997.
The deductibility of expenses
- Capital allowances:
- owhere the common property is vested in the proprietors or is being held by the strata title body as an agent for the proprietors, each proprietor is a holder of such assets for the purposes of Div 40 of the ITAA 1997.
- owhere the strata title body holds the common property as trustee for the proprietors, it is the holder of a depreciating asset forming part of the common property for the purposes of Div 40 of the ITAA 1997
- Capital works — the deductibility depends on whether the particular area is used for income earning purposes. To the extent it is, a deduction for the appropriate portion of construction expenditure is available to the entity incurring the expenditure if they own or lease the area.
Apportionment – Expenses related to earning both assessable income (non-mutual) and non-assessable income (mutual) need to be apportioned by using a method that is fair and reasonable.
Carry forward losses – As mutual receipts are not income, they do not form part of “exempt income” in the context of general domestic current year losses and undeducted prior year losses. The draft ruling also includes examples to illustrate these views.
Date of effect – The Commissioner proposes this ruling will apply both before and after its date of issue when finalised with the exception of para 14 which contains a clarification of the circumstances in which the Commissioner will treat a strata title body as a public company. When the final ruling is issued, para 14 will apply from the date of issue.
Comments – The closing date for comments is 8 May 2015. The contact officers are Sue Meulengraaf and Anura Kuhan-Pilat; email: sue.meulengraaf@ato.gov.au, anura.kuhan-pilat@ato.gov.au; phone: (08) 8208 1055, (08) 8218 9316; fax: (08) 8208 1055, (08) 8218 9316; address: Australian Taxation Office, GPO Box 9977, Adelaide SA 5001.
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The ATO [on Wed 25.3.2015] released Draft Taxation Ruling TR 2015/D1, which explains specific income tax issues that affect bodies corporate constituted under strata title legislation and proprietors of a lot held under that legislation.
Broadly, the Draft states that a strata title body is a company for income tax purposes and the Commissioner has a discretion to treat a company as a public company for the purposes of s 103A(5) of the ITAA 1936. It also examines in detail the assessability of some income and the deductibility of common expenses.
DATE OF EFFECT: When the final Ruling is issued, it is proposed to generally apply both before and after its date of issue.
[LTN 57, 25/3/15]
As a consequence of the issue of this Draft Ruling, the ATO has withdrawn Income Tax Ruling IT 2505 (Bodies corporate constituted under strata title legislation), and the following Taxation Determinations with effect from [Wed 25.3.2015]:
- TD 92/181: Do mutual receipts form part of “exempt income” in the context of general domestic current year losses and undeducted prior year losses?
- TD 93/7: Under what circumstances is a strata title body corporate required to lodge an income tax return?
- TD 93/73: Will a strata title body corporate be taxed as a non-profit company if it includes non-profit clauses in its by-laws?
- TD 96/22: Does the interest payable on late levies represent assessable income of a body corporate?
The ATO has also withdrawn the following IDs. The ATO says the issues in the IDs are considered in Draft TR 2015/D1:
- ATO ID 2003/224: Capital Allowances: cost of common property depreciating assets held before 6 October 2001 – ACT;
- ATO ID 2003/225: Capital Allowances: cost of common property depreciating assets held after 6 October 2001 – ACT;
- ATO ID 2003/226: Capital Allowances: balancing adjustment event for common property depreciating assets – ACT;
- ATO ID 2003/227: Capital Allowances: termination value of common property depreciating assets – ACT;
- ATO ID 2003/228: Capital Allowances: holder of common property depreciating assets – ACT;
- ATO ID 2003/229: Capital Works: deduction for common property – ACT;
- ATO ID 2003/591: Capital Allowances: identical common property depreciating assets costing $300 or less – NSW;
- ATO ID 2003/592: Capital Allowances: holder of common property depreciating assets – NSW;
- ATO ID 2014/24: Strata Corporation: mutuality principle.
[LTN 57, 25/3/15] [IT 25/3/15]