Important Tax Update: New Draft Ruling for Strata Schemes

The ATO has recently clarified its position regarding a number of income tax issues pertaining to bodies corporate constituted under strata title legislation, withdrawing Taxation Ruling IT 2505 and issuing a new draft ruling TR 2015/D1. The ATO is considering submissions in relation to the draft ruling and changes are possible.

There are some differences between the withdrawn ruling and the new draft ruling, but these largely involve confirmation of the ATO's position in relation to certain issues, setting out the ATO's reasoning, with supporting examples. In some respects, that position was not articulated in the withdrawn ruling and could be considered a change. However, by and large, the draft article confirms the current position regarding the accessibility of income and the deductibility of expenses.

The position will differ between States, which are different strata title legislation and these comments reflect the position in New South Wales. The key points are as follows:

  • Tax status - a strata owners corporation will be taxed as a "for profit" company and the Commissioner will exercise discretion to treat the owners corporation as a public company where the owners corporation is substantially in compliance with its obligations and responsibilities as set out in the applicable governing legislation.
  • Owners corporation assessable receipts – certain receipts by the owners corporation will not be mutual receipts and will be assessable to the owners corporation. These include:
    • Receipts from individual owners by way of the payment of Tribunal imposed penalties against owners, e.g. for by-law breaches.
    • Receipts from third parties by way of payment for use of personal property of the owners corporation, e.g. interest on investment of funds and charges for use of equipment.
    • Receipts from third parties by way of payment of fees for inspection of records, but not where received from an individual owner.
  • Owners corporation non assessable receipts - certain receipts by the owners corporation will be mutual receipts and will not be assessable to the owners corporation. These include:
    • Receipts from individual owners by way of administration and sinking fund levy contributions.
    • Receipts from individual owners by way of late payment interest in relation to levy contributions.
  • Lot owner assessable receipts - certain receipts by the owners corporation will be assessable to individual owners. These include:
    • Receipts from third parties by way of payment for use of common property, e.g. common property licence fees.
  • Deductibility of expenses:
    • Capital allowances - individual owners will be the holders of such assets for the purposes of Division 40 of the Income Tax Assessment Act 1997.
    • Capital works — to the extent that the particular area is used for income earning purposes, a deduction for the appropriate portion of construction expenditure is available to the entity incurring the expenditure if they own or lease the area.
  • Distributions to members:
    • Distributions to individual owners that are return of surplus contributions are not assessable income.
    • Distributions to individual owners out of profits derived by the owners corporation are dividends which are assessable income of the individual owners and are able to be franked.

 

***The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.

 

Prepared by Bannermans Lawyers

29 May 2015

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For more information on this topic or any legal enquiries please contact your Strata Team.

 

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