Taxing Times in Strata Buildings
When ignorance of strata tax rules may not be so blissful ...
Many strata rules and processes are misunderstood by stakeholders. But, how taxes work for strata buildings and strata owners are probably the most poorly known, understood and applied parts of strata operations. So, here’s an overview for strata tax dummies …
[9:00 minutes estimated reading time, 1801 words]
Become a paid GoStrata Stak subscriber
Introduction
Benjamin Franklin is credited with the famous quote ‘in this world, nothing is certain except death and taxes’ which plays on the inevitability of taxes for all of us.
But, I’d say that this is hardly true in strata buildings where I believe many taxes are routinely avoided.
That’s due to the complex and unusual tax rules that apply to strata buildings and strata owners, the low levels of strata stakeholder understanding of the tax regimes that apply, apathy about tax issues in strata buildings, and, a surprising lack of regulatory attention on strata buildings and strata owners by the ATO.
So, in this article, I’ll explain the strata tax regulatory environment and how the key tax rules apply to the different strata stakeholders.
Tax laws and ATO rulings
Obviously, taxes are payable because of the tax laws that apply in Australia which are set out in the Income Tax Assessment Act 1997, but that legislation is too dense to cover here.
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
Instead, the best guidance on how taxes work in strata buildings can be found in ATO public rulings that have been issued.
The primary and most important ruling is TR 2015/3: Income tax: matters relating to strata title bodies constituted under strata title legislation which has been in existence for many years and replaced previous rulings TD 92/181, TD 93/7, TD 93/73, TD 96/22 and IT 2505.
But, the following additional rulings can also apply to strata stakeholders:
TR 97/23: Income tax: deductions for repairs, and
TR 2020/2: Income tax: deductions for expenditure on environmental protection activities.
Strata taxpayers
Strata buildings are taxpayers and are treated as companies for tax purposes by the ATO with the same tax obligations. The ATO can also treat some strata buildings as public companies with higher tax obligations but that is uncommon.
Strata buildings are not treated as not for profit organisations.
The actual strata buildings included are listed in Appendix 2 of TR 2015/3, but they include most of the kinds of buildings you’d expect around Australia.
Strata owners are also taxpayers in their own right either as individuals, corporations or trusts and have independent tax obligations.
Mutuality and non-mutual income
TR 2015/3 recognises common property in strata title building taxpayers [and the fixtures and fittings in those areas] as areas not included in strata owner lots. But, it can distinguish situations by how the common property is legally held by the strata corporation between:
where the common property is held as a trustee, or
where the common property is held by the lot owners themselves.
That distinction is important when determining who is responsible for any taxes relating to common property.
The ruling also distinguishes income earned from the use of common property between income earned by lot owners when the use of the common property is connected to the use of their strata lot [as in a conventional apartment lease] and income earned by the strata building from the income is earned by using the common property independently of a strata lot or lots [like in a telecommunications tower lease].
Those distinctions align with the concepts of mutual and non-mutual receipts or income in strata buildings.
The principle of mutuality is based on the idea that you cannot derive income from yourself, so strata owners do not collectively earn money from themselves via the strata corporation when it’s paid by them as part of their strata ownership relationship.
So, mutual receipts or income is money received commonly by, or, from or for all strata owners to the common fund, in relation to their common obligations and/or in their capacity as strata building members [like strata levies or interest imposed on strata levies].
Mutual receipts or income is not treated as income for tax purposes, so there’s no tax payable on it by the strata building.
Non-mutual receipts or income is other money received by the strata building from non-strata owners and from strata owners when the mutuality principles do not apply.
Non-mutual receipts or income is assessable income and tax is payable on it.
But, applying the mutuality principles can get a bit tricky as the following examples demonstrate.
Strata levies are mutual income.
Income earned by strata buildings from strangers for the use of common property from strangers will be non-mutual income [such as leasing common property to telcos, licencing common property to strata owners and tenants, charging for use of facilities and equipment, etc].
But, income earned from strata owners for the use of common property is also non-mutual income even though it’s from an owner.
Interest earned on money in the bank or otherwise invested by the strata building is also non-mutual income.
Fees paid for strata records inspections by strata owners are mutual income.
But, when strata inspections fees are paid by non-owners they are non-mutual income [see paragraph 31 of TR 2015/3].
Penalties paid to the strata building under tribunal orders are non-mutual income [see paragraph 28 of TR 2015/3].
So, the application of the tax rules is not what you’d expect.
Strata owner tax liabilities and deductions
The unusual application of tax rules in strata buildings doesn’t end there, because not all non-mutual income receipts or are taxable in the hands of the strata building. Rather, some money received by strata buildings is treated as income in the hands of strata owners and assessable for the tax against them personally.
TR 2015/3 describes that scenario as follows:
income from the use of the common property is not assessable income of the strata building,
it is assessable income of the individual strata owners,
that is so even if the strata owners do not and cannot receive the income [which is usually the case]
similarly, the strata building is not entitled to any deductions in respect of common property or common property derived income,
strata owners will be entitled to those deductions in respect of common property derived income instead, and
strata owners are treated as receiving and can utilise income and deductions in respect of common property derived income in proportion to their lot entitlements.
This unusual outcome [where money earned by the strata building is kept by it but the strata owners pay tax on it] because those strata owners receive a benefit against the amount needed to be levied on the proprietors by the strata title body as contributions to the administrative or other funds.
The classic scenario used to illustrate is the rent earned from a telecommunications lease of the strata building rooftop as follows.
A telco pays the strata building rent
The rent is kept by the strata building and used to pay operational expenses [or for capital works if transferred between funds]
Strata owners’ levies are less as a result
The strata building does not pay tax on the telco rent
The strata building cannot claim deductions for any costs associated with earning the telco rent.
Strata owners should include part of the rent [based on their proportionate lot levy entitlements] in their assessable income for that year.
Strata owners can deduct part of any costs associated with earning the telco rent.
It’s all pretty simple, but I’d be very surprised if it’s happening in most strata buildings due to awareness and understanding, non-disclosure of the non-mutual income to strata owners, commercial incentives towards non-compliance, and, low or non-existent tax enforcement.
A few other less common strata tax issues
There are also a few less common, more complex and even less understood tax issues in strata buildings as follows.
Capital gains
Like income, any capital gains earned by a strata building from the sale or other use of common property is taxable under the mutuality principles in the hands of the strata owners.
So, if a strata building sells part of the common property to a neighbour, developer or lot owner or receives a payment for granting exclusive use of the common property, that money is a capital gain by all the strata owners.
Exactly how the capital gain affects each strata owner will depend on their circumstances and is beyond the scope of this article.
Depreciation
Depreciation can be claimed as a deduction against associated income by many owners of real estate on newly built structures at attractive and sometimes accelerated rates. That includes new strata buildings and capital improvements in existing strata buildings.
Typical these deductions are only available to investor owners and like non-mutual common property income and gains, is attributable to strata owners according to their proportionate lot entitlements.
GST
Capital gains tax is another quirky area for strata buildings as follows.
All strata buildings carry on an enterprise for GST purposes and so can register for GST.
If a strata building’s annual turnover exceeds $75,000 it must register for GST.
If registered for GST, then all fees charged by a strata building for services must include GST.
Strata levies are also considered to be a taxable supply [which has always seemed weird to me] and so must also include GST.
Strata buildings can claim input tax credits for payments relating to maintaining and administering the common property.
Strata owners who are registered for GST and make strata levy payments as part of that enterprise can claim input tax credits for the strata levy payments.
One interesting anomaly of these strata GST provisions that has bugged me and some of my strata friends is that whilst water rates are GST free or exempt when a strata building levies strata owners for amounts that include payments for water rates GST is added to them.
More detailed information about GST in strata buildings can be found here and in GSTR 2000/37.
Defect repairs & combustible cladding works
Money paid by investor strata owners to strata buildings for repairing defects through strata levies is deductible against income and not as a capital expense.
But, money paid for fixing combustible cladding can only be claimed as capital deduction over either 25 or 40 years.
More detailed information about those 2 specific matters can be found here.
Conclusions
I’m not surprised that there are low levels of awareness of tax rules and who they work in strata buildings by most stakeholders as they are detailed, complex, boring and illogical. And, I expect that tax compliance levels are relatively low.
But, given the significant amount of money passing through Australian strata buildings each year, non-compliances mean lost tax revenue that should be paid by many strata buildings and strata owners as well as many tax deductions that are no being claimed by investors.
So, strata tax-related information and services to strata buildings, strata owners and investors seem another necessary and worthwhile area to focus on.
September 06, 2021
Francesco ...