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I know there are strong arguments against common water metering in apartment blocks, but there is one issue that I am wondering whether anyone else has looked into. It’s probably easiest to explain with an example:
Our building pays around $50,000 per year in water usage costs. These usage costs are paid by the strata plan & funded through our levies. Our strata plan (like most) is GST registered so it is required to add 10% GST onto levy contributions. So to pay the $50,000 in water rates it is required to raise a levy of $55,000 including GST. It collects the $55,000 and pays out $50,000 for the water rates and $5,000 to the ATO for the GST it has collected.
If the usage was charged directly to each individual owner it would only cost $50,000 in total….versus the $55,000 it costs via strata levies. So we are effectively paying GST on water.
I’m an accountant so sadly I have a good understanding of how GST works, but is there something I’m missing here? A solution might be to identify water as a separate GST free charge on levy notices. Has anyone else seen this?
Cheers
Tony
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The ATO does not require Strata Plans to pay tax provided they're covered by the principle of mutuality, that is, the Plan's only income is derived from the Levy Contributions paid by its Proprietors.
Sadly, most Plans receive interest on their funds, the Sinking Fund in particular, and so should pay Company Tax on that and any other income.
So far as the GST is concerned, if the value of your Plan's taxable supplies exceeds the threshold and its GST Registered, shouldn't it be calculating its annual budgets with all amounts as GST inclusive only where that applies?
That is, in the case of water usage the amount shown in the Administrative Fund budget does not include GST, and in the case of contracted services such as grounds maintenance the amount shown includes GST, and when all budget items are summed, the total is GST inclusive (but only where applicable).
Levy Contributions are then shown as GST Inclusive on Tax Invoices.
I hope that's the correct approach, because that's what I'm doing; but then our Plan's not GST Registered as our taxable supplies (Levies) don't exceed the threshold simply because self-management keeps our costs down.
This is an interesting topic for a few reasons.
We (my SP) make significant income from various source in our SP that is not principal of mutuality income. We never declare the non-mutual amounts, some years we make between $10-20k. The auditors report shows we are not paying tax and that we scream principal of mutuality in relation to our SPs finances.
One treasurer once claimed there is a threshold ($ amount) the OC muct pass before the ATO cares about non mutual income?
Is this true?
A point of clarification, when I said that “Levy Contributions are then shown as GST Inclusive on Tax Invoices” I mean’t under the scenario described – not that I was doing that, as our Plan’s not GST Registered.
Further, when I said that Plans receiving income from sources other than from Proprietors’ (levy) contributions “should” pay company tax, that was a subtle reference to the fact that many don’t!
When our Plan parted company with its Strata Manager 6 years ago, as Secretary / Treasurer I inherited all the records, including financial statements and external audits that suggested all was well.
Then I found out that all income other than that from Proprietors’ contributions was not covered by the ATO’s ruling under the principle of mutuality, and that we should have been submitting Company Tax Returns for years. So much for audits !!
As for whether or not the ATO “cares about non-mutual income” (Ben's post), I’d suggest that it cares about simply everything, and that Strata Plans who don’t declare non-mutual income such as interest are risking fines and back-tax assessments, but….as a non-accountant / Secretary & Treasurer of our self-managed Plan I’d like to see some definitive information about the tax obligations of Strata Plans from the experts.
Hi,
You can see the tax ruling on Income Tax for Bodies Corporate at
https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2505/NAT/ATO/00001
Cheers
Chris
Whale said:
……
Then I found out that all income other than that from Proprietors' contributions was not covered by the ATO's ruling under the principle of mutuality, and that we should have been submitting Company Tax Returns for years. So much for audits !!….
Audits; most people in my SP think because we get an audit every year that everything is fine but the audit is not about how well the OC complies with legislative and tax obligations.
The auditor basically looks at a percentage of all the financial transactions, checks they exist and then extrapolates that result to say that everything is in order, i.e. the auditor checks that the Treasurer is not squirreling away money for a trip to Spain. The auditor does a equity report (financial position), does an income and expenditure report and then sends us a bill.
On an income/expenditure report it is clear if an OC is getting non mutual (and / or business venture) income but the auditor is generally not commissioned to say an OC should be paying tax, or that the levy interest is not calculated properly, or that the accounts are not as specified by the SSMA or PSBA or that the OC needs to strike a special levy to repay money it transferred from the sinking fund to the admin fund – the auditor just checks that money is accounted for.
There are 3 types of strata income*
mutual – tax free
non mutual – OC pays tax on it
business venture – each owner needs to declare their share on their individual tax return
Most OC's need only worry about the first 2 types of income and most do not bother with the non mutual stuff because most OC's do not make a lot of non mutual income anyway. Most SPs are relatively small consisting of less than 20 units, not a lot of tax is being avoided. Once larger SPs become more common then the ATO might come looking for its tax money. One day legislation might require large OC's to submit financial reports like “mum and dad” incorporated clubs have to. It is funny how the local sport club with its $1500 bank balance needs to submit annual financial reports (form A12) to OFT but OC's operating budgets of hundreds of thousands of dollars do not.
The point is that audits are just a paper trail check and have little to do with legislative or tax obligations.
*See chapter 9 of NSW Strata and Community Schemes Management and the Law for more details on the 3 types of income and how to deal with them – available from any good library
An excellent post; thanks Ben!
Call it paranoia, but I'll keep submitting the ATO's 2 page Strata Title Body Corporate Tax Return, where I declare the interest that our Plan receives on its deposits, and make our 30% contribution to Mr Swan's budget surplus in 2012/13.
The IT 2505 tax ruling is the necessary one to read. However, it is rather old and strata legislation has changed in various places. A key difference point to note is whether common property is held by the OC as 'agent' for the owners or as 'trustee' for the owners. At the time IT2505 was written the ACT strata title legislation had the word 'trustee' but more recently has had 'agent'. The reason this matters is that non-mutual income derived from property held as trustee is taxed at the corporate rate in the hands of the OC, IE simple and easy. Non-mutual income derived from common property held as agent has to be divided up in proportion to unit entitlements and each owner has to declare their portion on their private tax returns.
Crucially, the ATO gave our OC a ruling that we could resolve to purchase solar electric equipment that would attract a feed-in tariff to be held as trustee for the owners, even though common property is generally held as agent under the ACT Unit Titles Act. The result was that solar feed-in income is worth doing for our OC because all benefit equally in proportion to unit entitlements and there is little administrative burden. Held as agent we would have had to issue a statement to each of over 100 owners who no doubt differ in their tax circumstances and would benefit to differing degrees. This could well have been enough to make the proposal unworkable.
The ruling was provided to the review of the ACT Unit Titles legislation which has just been amended to now explicitly allow OCs to purchase sustainability equipment to be held by the OC as trustee for the owners which greatly eases the administrative burden and forms part of a suite of amendments to make it easier for OCs to install sustainability infrastructure.
Whale said:
An excellent post; thanks Ben!
Call it paranoia, but I'll keep submitting the ATO's 2 page Strata Title Body Corporate Tax Return, where I declare the interest that our Plan receives on its deposits, and make our 30% contribution to Mr Swan's budget surplus in 2012/13.
A sensible course of action. It would be nice if the ATO simplified the form for people declaring little more than interest on the bank balance.