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Our AGM is due shortly and I have some questions that I would like to raise at the meeting. However, before the meeting I guess I should confirm that I have some facts at hand.
I cannot find in any documentation that details the interest paid on our strata funds in the bank – should this be communicated on a regular basis? If so, where should I find it? The budget estimate details bank fees and sundries but I can’t find any reference to income from interest.
Is there a fixed or usual percentage split of levy payments between admin and sinking funds?
Many thanks,
Dudley
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At the AGM financial statements should be presented. They should state income from all source (levies will be the biggest by far) and all expenses for the past year. One source of income should be some amount of interest on money held in the OC’s bank account. Something is wrong if this is not stated in the AGM papers.
Usually, there would be some amount proposed to be levied for the sinking fund (usually an amount anticipated for each year of a sinking fund plan) and some other amount proposed to be levied to meet the budgeted expenses of the admin fund. Usual resolutions at the AGM would be to approve the budget and approve the amount to be levied.
What you end up paying will be the admin fund levy plus the sinking fund levy. There is no predetermined split between these because OCs differ in their regular, annual expenses (admin) and their anticipated but infrequent major items (sinking fund).
Depending on how conscientious your SM is the all money might be sitting in a current a/c earning 0% interest and that is why no income is shown.
A good SM will put most of the Sinking fund into a term dep for say 12 months, but the EC or OC can instruct the SM what to do with the funds (term and amount) at the AGM and nominate someone to oversee this throughout the year.
Bear in mind any income you receive is taxed at 30% (company tax rate) and so IMHO it is better to keep the sinking fund low and raise special levies when required.
If the answer at the AGM is that there was no interest reported because none was earned then the question should be asked why the OC’s funds were not in an interest-earning account. The larger part of our OC’s funds are in two term deposit accounts with maturity dates about 6 months apart earning reasonable interest and one working account earning less but with enough for fluidity to pay the bills.
I agree that the OC should not hold excessive cash reserves but I would not go so far as to prefer special levies over a sinking fund plan that anticipates expenses and spreads the cost equitably over an extended period. It is not equitable that only the people who happen to be owners in the year of a big expense cover the cost of maintaining something that has been enjoyed by past owners for possibly decades.
A bit in reserve makes things much easier for the EC when the unexpected happens. It can be explicitly a ‘contingency’ component to a sinking fund plan in addition to the named, known items. Owners are much more likely to agree to a necessary expense if it can be covered from savings rather than a new levy.
@Dudley said:
Our AGM is due shortly and I have some questions that I would like to raise at the Meeting.I agree with everything that has been said, but note that your questions will need to be directly to do with Motions on the Meeting Agenda, for example when the Motion to receive the financial statements is tabled, it’s then that you can raise questions about the income received from interest.
In NSW there can be no non-specific Items on the Agenda such as “General Business”, although discussions of that type including general questions may occur after the conclusion of the Meeting provided no resolutions are taken that would involve the Owners Corporation doing anything about any issues then discussed.
I believe some strata managers hold accounts in non-interest bearing accounts because in NSW at least the income form the interest is supposed to be added to the taxable income of the individual owners.
Apportioning the income so that it can be taxed correctly is often considered to be not worth the hassle either for the owners or for the Owners Corp. Unless the tax laws have changed recently, the same also applies to income from things like the sale or rent of common property.
I believe there is also a tax impost for unspent accumulated Sinking Funds – perhaps someone with a better tax brain than mine have could illuminate us.
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The key tax ruling for owners corps is:
https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2505/NAT/ATO/00001
It describes when income is mutual or non-mutual, and when non-mutual income is taxed at the corporate rate in the hands of the OC and when the tax liability is divided up among unit owner in proportion to unit entitlements. It is not obvious to me when bank interest would have to be divided up.
Setting aside the tax question, the OC/EC needs to resolve to put any money in an interest bearing account, or invest it in another way, it is not up to the strata manager unless the y have delegated power.
i knew of an OC who traded their funds on a forex account. I thought that was very brave….
I have just read and tried to understand the Tax Commissioner’s statement attached to Peter C’s posting below (thanks, Pete).
The key to why some Owners Corps would not put money into interest earning accounts lies, I think, in the passage replicated here:
21. The practice of granting exemption from lodging returns where all the income derived by the body corporate is mutual in nature, i.e., consists solely of proprietors’ levies or contributions, will be continued. In cases where income is derived from non-mutual sources, i.e., interest and dividends from invested funds, fees from non-proprietors for access to books etc; a return is required to be furnished. It’s not the tax on the interest that’s the issue as much as the cost of preparing tax returns. If all the Owners Corp’s income is “mutual” – it’s only coming in to pay bills so it’s not really income – then the Owner’s Corp doesn’t have to prepare and submit a tax return.
If you start earning interest, then you do have to get your accountants to prepare a tax return. The question then is, does the amount you make in interest exceed the cost of preparing an annual tax return. I reckon that would be a line-ball decision, especially for smaller Owners Corps.
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@Dudley said:Re: raising these issues at the AGM.
Should I communicate my wish to discuss these issues and request that they be listed on the agenda or just raise them when the motion requesting that the financial statement be approved is raised?
My advice is that provided you have enough time to submit the issues you wish to raise in the form of a Motion on the Agenda of your AGM, then that’s the best way forward as it provides both your Executive Committee and Strata Manager with the notice necessary to prepare themselves by bringing appropriate information to the Meeting.
Otherwise, you’re likely to get the “I’ll take that Motion on notice, and get back to you” response.
Now back to the broader issue of an O/C’s tax liability, I’m not an accountant, but my interpretation of the Commissioner’s Ruling IT2505 is that in NSW where the Common Property is held in the name of the Owners Corporation (O/C) as “agent” for the Proprietors:
- Levies paid (to both Funds) are covered by the principle of mutuality, where the ATO does not regard those amounts as income
- Interest received, and Fees charged by the O/C for things such as preparing S108 Certificates are accessible income in the hands of the O/C, and liable to tax at the Company Rate (30%)
- The costs of managing the Plan, such as the SM Fee, Bank Fees etc are deductions for the O/C
- Income received by the O/C from the use of its Common Property, such as from a solar feed-in tariff, and from the rent or use of commercial areas in a mixed-use plan, off-sets an amount that would otherwise need to be paid by Proprietors (via Levies), and so those amounts are taxable in the hands of those Proprietors in proportion to the Units of Entitlement of their Lots.
Anything more (or at odds with my interpretation) from posters with more relevant expertise?
Just to put this into context we recieved $1,700 interest and paid tax of $363 tax and the tax return cost us $112 (this is from the EOFY statement).
We are a small 10 lot complex with a SM in QLD. The only income we have are levies and interest and so the Strata pay Corporation tax on this income as above.
So for us it’s def work having term deposits.
I tried reading the tax rule as well but it’s way beyond my capabilities to understand it.
The SM doesn’t usually copy the EC on the tax return, but all owners should see the tax agent’s fee and any tax paid in the annual accounts.
Whether you get interest depends on whether the SM holds your funds in their trust account or an individual trust account for your Strata Plan.
If it’s in their trust account, any interest is on-paid by law to … guess who … Fair Trading.
Our (large) SM used to do this until several years ago. The interest on-payment is actually at a “deemed” rate, so I guess when interest rates fell, and SMs were no longer making a “profit” (on top of management fees and undisclosed insurance commissions), maybe even making a loss, they changed all their clients to individual trust accounts. Or maybe they just decided that was the fair thing to do after all those years.
When the SP earns interest, it has to submit a tax return.
Our tax return cost $165. At the RBA cash rate of 2.75%, if your SP’s accumulated funds are over $8,571 then it’s better to have an individual trust account. [165/0.0275/0.7]
If your SP’s accumulated funds are not over $8,571 then you should probably review your 10-year Sinking Fund Plan.
You should probably also instruct your SM to open an individual trust account.
If they don’t want to, then get a new SM.
@Dudley said:
Should I question the need for a tax return given JimmyT and PeterC’s responses?
If you are not earning money form the sale or rent of common property. or from interest accrued on your admin and sinking funds, then you have no need to submit a tax return and you should certainly question why you are being charged for doing so.
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