Article contributed by Peter Dawkins, Partner at Kelly + Partners Chartered Accountants
On Wednesday 25 November 2015, The Australian Taxation Office issued Taxation Ruling TR 2015/3 which finalised Draft Taxation Ruling TR 2015/D1 (issued 27 March, 2015). As noted in our summary of Draft Taxation Ruling TR 2015/D1 circulated in June 2015, previous Taxation Ruling IT 2505 along with Taxation Determinations TD92/181, TD 93/7, TD93/73, and TD96/22 were withdrawn effective 27 March, 2015.
The structure of Taxation Ruling TR 2015/3 is such that the actual ruling is contained in paragraphs 1 to 48 (legally binding), with the remaining paragraphs, 49 to 102 (not legally binding), containing additional information under Appendices 1 and 2 which assist in understanding the Taxation Office’s view.
Apart from a few amendments outlined below, Taxation Ruling TR 2015/3 does not alter the Taxation Office’s view of the taxation of strata title bodies, the main aspects of which may be summarised as follows:
- Income from personal property which the strata title body owns in its own right (such as its own money and other moveable property such as washing machines, driers, lawn mowers) is taxed in the hands of the strata title body, including:
- Interest on bank accounts and investments.
- Search and certificate fees from non-proprietors. Costs or fees for providing searches or certificates should be generally deductible against this income.
- Laundry money from a coin-operated washing machine, telephone money from a pay telephone, or hire fees from movable property. Expenses relating to this income, including depreciation, are deductible against this income. If a portion of this income is received from proprietors, the portion is excluded as mutual income.
- Proceeds from the sale of an item of personal property.
- Income received from proprietors is broadly excluded from taxation under the principle of mutuality. Examples include:
- Interest on arrears
- Laundry money received from proprietors
- Income from common property (other than personal property) is taxable in the hands of the individual proprietors in proportion to their unit entitlements. Following our discussions with the Taxation Office and at our suggestion, paragraphs 42 and 43 include an example of the increasingly common situation of income received from a telecommunication company for placing a cellular telephone tower on a strata building’s roof. The Taxation Office’s view of this income is that it is taxable in the hands of proprietors even if there is no physical distribution of this income to proprietors or where the rental income is paid directly to the strata title body (refer paragraph 96). Deductions against this income are also allowable in proportion to proprietors’ unit entitlements under Division 40 and Division 43 of the Income Tax Assessment Act 1997.
- In those instances where a strata title body makes a physical distribution of funds to proprietors, the income tax position is:
- Where any surplus contributions are returned to proprietors, such surpluses are not assessable income to proprietors.
- Where the distributed funds represent profits from outside sources (i.e. from non-proprietors), the distribution is taxable to the proprietors and may be franked by the strata title body under the imputation system.
- Where the funds are a distribution of income from common property, the funds are taxable in the hands of proprietors as noted in point 3 above. Care should be taken not to duplicate this income to proprietors since this income is taxed in the hands of proprietors regardless of any physical distribution.
As mentioned above, Taxation Ruling TR 2015/3 contains a number of changes to the views previously expressed by the Taxation Office as to the taxation of strata title bodies. These are:
- In paragraph 21 (paragraph 14 in Draft Taxation Ruling TR 2015/D1) the Commissioner’s discretion to treat a strata title body as a public company will be applied where the scheme is “in substantial compliance with its obligations and responsibilities as set out in the applicable legislation”. As noted in “Appendix 1 – Explanation” paragraph 51, minor breaches of, for example, an administrative nature should not cause the Commissioner to refuse the application of this discretion. The exercise of this discretion removes the unintended consequences which may arise should a strata title body be taxed as a privatecompany and as such attract the additional taxation provisions of, for example, Division 7A, which broadly relates to the use of “company” property by a shareholder (i.e. owner) or associate. Please note this provision of Taxation Ruling TR 2015/3 applies from 25 November 2015 whilst the remainder of Taxation Ruling TR 2015/3 applies retrospectively.
- In Example 1 of Taxation Ruling TR 2015/3 (paragraphs 26 to 28) a penalty received by a strata title body from a proprietor and imposed by a statutory tribunal (e.g. for breaching a by-law) is not considered to be mutual income and is taxed in the strata title body. This same view was expressed in Example 1 – paragraphs 19 to 21 in Draft Taxation Ruling TR 2015/D1.This treatment should be distinguished from penalty interest paid by a proprietor for late payment of levies which is mutual income and not assessable to the strata title body (refer Example 2 – paragraphs 29 and 30).
- In paragraph 19 there is a change in the Taxation Office’s approach relating to common property ownership by accepting that “in relation to all proprietors in all strata schemes registered under State and Territory Acts, the proprietor is the legal and beneficial owner”. The previous Taxation Ruling IT 2505 and Draft Taxation Ruling TR 2015/D1 referred to the various State and Territory Acts as to the ownership of common property. This resulted in common property “being vested in the body corporate as trustee for the proprietors…” in accordance with the legislation of South Australia, Tasmania and the Northern Territory. The effect of this change in approach is to standardise and simplify the treatment of assessable income derived from common property as being taxable to the proprietors as opposed to beneficiaries of a trust, which had the additional requirement of preparing a trust income tax return showing the distribution of assessable income to each proprietor who would then be required to include this income in their own tax return (please note this may still be required where a proprietor is under a legal disability in relation to receipt of income from a trust). Further reference should be made to paragraphs 41 and 98 of Taxation Ruling 2015/3, with the latter paragraph providing for the former treatment as prescribed in previous Taxation Ruling IT 2505 to be continued if so desired.
The above is general information only and should not be relied upon. Please contact Peter Dawkins on (02) 9923 0800 should you have any questions.
The content in this paper is intended only to provide a general overview. It is not intended to be comprehensive nor does it constitute tax nor legal advice. You should seek professional advice before acting or relying on any of the content.