Financial Management

A Tax File Number (TFN) is an entity’s unique reference number in the Australian Taxation System. It is assigned by the Australian Taxation Office (ATO) and may be either 8 or 9 digits long depending upon when the TFN was registered. No entity (individual or corporate) shares the same TFN as another. A TFN is required by a strata company to lodge a tax return, and/or apply for an Australian Business Number. In addition, TFNs are also widely used by the ATO as the means of identification when updating contact and financial institution details. It is therefore very important to keep TFNs secure and to not lose them.

An Australian Business Number (ABN) is another type of unique reference number used by the ATO. Unlike a TFN, eligibility for an ABN is restricted to business entities only. It does not replace a TFN but instead, must be linked to one. An ABN is required by a strata company to register for and claim GST, take on employees (eg: caretakers) and avoid tax being withheld on some receipts. ABNs are listed on a publicly available register called the ‘Australian Business Register’ (ABR).

Within the strata industry, it is commonly regarded as best practice for every strata company to have a TFN and an ABN in place. A TFN becomes essential once the strata company earns assessable income, such as bank interest, or status certificate income collected during the sale of a lot. Without a TFN, the strata company may be unable to properly meet its tax obligations, and banks will generally withhold tax from interest earned at the highest marginal rate, currently 47%. An ABN is a sensible addition and provides several practical benefits, and obtaining one does not in itself create any extra tax or reporting obligations. As both registrations can generally be obtained together with minimal effort, having a TFN and ABN in place from the outset helps the strata company remain compliant, protect its financial interests, and avoid unnecessary administrative complications as circumstances change.

A public officer is a company’s representative to the Australian Tax Office (ATO) and is responsible for the company’s obligations under Section 252 of the Income Tax Assessment Act 1936. The public officer is responsible for the company complying with taxation requirements and is also liable for the same penalties as the company if there are any violations. A company only ever has one public officer at a time, who needs to be at least 18 years of age, ordinarily reside in Australia, and be capable of understanding the nature of the person’s appointment as the public officer of the company. For a strata company, the public officer does not need to be a member of the Council of Owners, nor an owner of the strata company.

A public officer does not need to be appointed as part of the registration of a strata/survey-strata plan. However, the ATO must be notified of an appointment within 3 months of the strata company carrying on a business or deriving income (eg: raising levies). The penalties for not doing this are severe and accumulate by one ATO penalty unit each day. If the person acting as public officer changes, the ATO must be notified within 28 days of the change or the same penalties can apply.

Ordinarily a resolution is passed at a meeting of the Council of Owners appointing the public officer. The appointed person needs to sign a form consenting to act as the strata company’s public officer and this form should be stored with the strata records. Once consent has been obtained, a ‘Change of registration details’ form needs to be sent to the ATO informing them of the appointment. This form needs to contain information sufficient to identify the individual on the ATO’s records (ie: personal TFN, DOB, residential address etc).

Under Australian tax law, any income that is derived from assets owned by the strata company is generally considered to be assessable for income tax purposes. Such assets can include cash, financial assets (eg: shares), physical assets (eg: laundry machines) and even the strata company’s records. Strata companies are entitled to claim certain deductions against their assessable income and the net result (‘taxable income’) is subject to income tax at the prevailing company tax rate. The most common examples of assessable income in strata are interest earned on investments, laundry collections, and funds received for providing status certificates. Other examples include income from container refund schemes and income from certain types of embedded networks.

The ATO has long recognised that levy income is effectively payment by owners to owners. The principle of mutuality applies to such income (ie: ‘one cannot make a profit out of oneself’) and therefore levy and arrears income earned by a strata company is not assessable for income tax purposes. Income derived from the leasing of common property (eg: phone tower income) is assessable to the owners in their own personal tax returns, and not to the strata company itself.

Strata companies are treated as public companies for income tax purposes in line with Taxation Ruling 2015/3. They are required to lodge an annual company tax return each year declaring any assessable income earned during the previous financial year (July – June) and to pay the outstanding balance (if any) before the applicable due date. It is worth noting that it is the ‘earning of income’ and not necessarily the ‘making of a profit’ that necessitates a tax return. For any year in which no assessable income is earned, a strata company is required to notify the ATO that no tax return is required for the year via a Return Not Necessary (RNN) submission. Failure to either lodge a tax return or submit a RNN will put the strata company at risk of non-lodgement penalties from the ATO.

Goods and Services Tax (GST) is a consumption-based tax charged on most goods and services produced in Australia. GST-registered entities must charge 10% GST on all taxable supplies (including levies) they make and can claim back any GST included in supplies they purchase. The net amount (GST on sales less GST on supplies) is then paid to / refunded by the Australian Taxation Office (ATO) via Business Activity Statements (BAS). When a strata company is registered for GST, it is allowed to claim back any GST paid to suppliers in the course of maintaining the common property. This reduces the amount of levies that need to be raised each year, however 10% GST needs to then be added on top of all levies raised.

A strata company must register for GST if the forecast total of all levies for the coming 12 months exceeds $150,000. If a strata company is expected to raise levies totalling under $150,000 for the coming 12 months, it may still voluntarily register for GST. This may be financially beneficial for commercial schemes, and where a significant deficit is forecast. It is important to obtain professional advice from a suitably qualified accountant whenever a strata company is considering voluntary registration. The GST registration threshold for strata companies is double the normal GST registration threshold of $75,000 because the ATO allows strata companies to be regarded as not-for-profit entities for GST purposes, so long as there is no intention to distribute profits to the owners.

A business must be registered with the Tax Practitioners Board (TPB) in order to legally provide BAS services for another entity. The definition of a BAS service is wide ranging and even includes simply advising about any GST obligations or entitlements of a client. For this reason, Apogee Strata always engages TPB registered professionals to look after the GST requirements of our clients. Registration with the TPB ensures that the preparers of tax documents are experienced, qualified, engage in ongoing professional development and have sufficient professional indemnity insurance as required by the TPB.

The various Australian State and Territory strata Acts differ in their description of how common property is legally owned. Notwithstanding this fact, the Australian Taxation Office (ATO) applies a consistent approach to all strata companies by treating income derived from the leasing of common property as assessable to the owners in their own tax returns. In short, strata companies are not required to declare or pay tax on income derived from the use of common property. The basis for this treatment can be found in the ATO’s Taxation Ruling 2015/3 – Body Corporate Income Tax Matters.

Some of the more common examples of common property income include leasing of roof space for phone towers, billboard signage on walls and roof space, rent of a commonly owned unit, and income related to certain types of embedded networks. Put simply, where income is obtained from a third party (ie: a non-owner), and that income has come from the use of common property, it is likely that the owners will need to declare it in their own tax returns. In cases where owners don’t take physical receipt of common property income, Taxation Ruling 2015/3 explains that the owners still receive a benefit in that the amount needed to be levied would be reduced by the income received by the strata company. Owners therefore are still required to declare this income in their own tax returns irrespective of whether they receive the funds or not.

The strata company itself is not under any obligation to lodge documents for common property income with the ATO. That being said, it is still a prudent step for strata companies that do earn such income to advise all owners of their obligations, their income and the potential deductions to which they may be entitled, in a timely manner to ensure they receive this information prior to preparing their own returns. Owners may take the scheme’s financial statements to their own accountant, who can calculate their share of income and any deductions they may be entitled to claim.