Body Corporate Payment of Income Tax
Monday, 21st June 2010
Bodies corporate which are constituted under various State strata title legislation are required to pay income tax. This means for instance, strata title plans in New South Wales and community title schemes in Queensland are subject to income tax and must lodge an annual income tax return when they derive assessable income.
The Taxation Office has issued an income tax ruling, IT 2505, setting out the income tax requirements of bodies corporate. The main aspect of this ruling are as follows:
- A body corporate is within the definition of a company and as such it is taxed at the corporate tax rate which is currently 30%.
- The "principle of mutuality" applies to bodies corporate, which in summary applies where the class of persons contributing the income and the class of persons receiving the benefits are the same. In practical terms this means that the body corporate cannot make a profit from dealing with its own members (ie. proprietors). This being the case, levies which a body corporate collects and levy arrears interest received from proprietors are not assessable income and therefore are not subject to income tax.
- In relation to income which is subject to income tax, such income is referred toas non-mutual income (ie. income from non-owners or non-proprietors). The main types of non-mutual income received by bodies corporate are bank interest and inspection fees received from potential purchasers of lots within a body corporate.
- With respect to income tax deductions, these are limited as generally all expenses a body corporate pays for running a building on behalf of the proprietors are not deductable for income tax because they do not relate to the derivation of assessable income.
- In relation to expenses for which a tax deduction is allowed, amounts paid to a strata manager for arranging inspections of records is allowable as this is incurred in body corporate deriving inspection fee income which in turn is subject to income tax. In addition to this IT 2505 recognises that an administration expense such as management fees can relate to the derivation of assessable income (for instance, the manager will produce budgets from which levies are rasied and excess monies are invested, thereby enabling the body corporate to receive interest income from a financial institution) in which case IT 2505 sets out a formula to calculate the proportion of such expenditure which will be allowed to be claimed as an income tax deduction.
- Non-mutual income derived from what is defined as personal property of a body corporate is also subject to income tax. The term personal property relates to movable property or goods and chattels and includes such items as washing machines, driers, lawnmowers, garden hoses and money. An example of this would be income derived from non-proprietors (eg. Persons renting within a block of home units) using coin operated washing machines.
Another important aspect in relation to the income tax consequences of bodies corporate is that of income received from common property. Under IT 2505, a body corporate is not taxed on income it receives from common property. Rather, this income is taxed in the hands of the individual proprietors based on their unit entitlements.An example of this is where a body corporate receives rent from a telecommunications company for placing a cellular phone tower on the roof of a building. Such income relates to the use of common property and the body corporate will not include this in its income tax return. What is required is for the proprietors to include their portion of this income based on their unit entitlements (after allowing for any expenses directly relating to this rental income) in their own income tax returns.Please not the above relates only to income tax and not capital gains tax or GST, to which other legislation applies.This is general advice only. For application to specific circumstances, professional advice should be sought.