It's Taxing Times for Strata Buildings & Strata Owners
or, when the inevitable meets the ignorant & unmovable …
A Quick Read
Many strata laws, rules and processes are misunderstood by all kinds of strata stakeholders. But, how taxes work for strata buildings and strata owners are probably the most poorly known, understood and applied features of strata title building operations.
So, here’s an overview for strata tax dummies …
[a 9:50 minute read, with 1500 words]
The Full Article
INTRODUCTION
Benjamin Franklin is credited with the famous quote:
‘in this world, nothing is certain except death and taxes’
which plays on the inevitability of taxes for all of us.
But, I’d say that this is hardly true in strata buildings, where I believe most strata owners routinely avoid taxes.
That’s due to the complex and unusual tax rules that apply to strata buildings and strata owners, the low levels of strata stakeholder understanding of the tax regimes that apply, apathy about tax issues in strata buildings, and, a surprising lack of regulatory attention on strata buildings and strata owners by the Australian Taxation Office.
In this article, I explain the strata tax regulatory environment and how the key tax rules apply to the different strata stakeholders.
TAX LAWS & ATO RULINGS
Obviously, taxes are payable by all Australians and Australina business and not for profit entities because of the tax laws that apply and which are set out in the Income Tax Assessment Act 1997, but that legislation is too dense to cover here.
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
And, the best guidance on how taxation works in strata buildings can be found in ATO public rulings that have been issued.
The primary and most important ruling is TR 2015/3: Income tax: matters relating to strata title bodies constituted under strata title legislation which has been in existence for many, many years and replaced previous rulings TD 92/181, TD 93/7, TD 93/73, TD 96/22 and IT 2505.
But, the following additional rulings can also apply to strata stakeholders:
TR 97/23: Income tax: deductions for repairs
TR 2020/2: Income tax: deductions for expenditure on environmental protection activities
STRATA TAXPAYERS
Strata buildings are taxpayers and are treated as companies for tax purposes by the ATO with the same tax obligations as companies have.
The ATO also treats some strata buildings as public companies with higher tax obligations but that is uncommon.
Strata buildings are not treated as not for profit organisations.
The actual kinds of strata buildings included are listed in Appendix 2 of TR 2015/3, but they include most of the kinds of strata buildings you’d expect to find around Australia.
Strata owners are also taxpayers in their own right either as individuals, corporations or trusts and have independent tax obligations from their strata buildings.
MUTUALITY & NON-MUTUAL INCOME
TR 2015/3 recognises common property in strata title building taxpayers [and the fixtures and fittings in those areas] as areas not included in strata owners’ lots.
But, the ATO distinguishes strata buildings by how the common property is legally held by the strata corporation between:
where the common property is held as a trustee for the strata lot owners, or
where the common property is held by the strata lot owners themselves.
That distinction is important when determining who is responsible for any taxes relating to the common property.
The ATO ruling also distinguishes income earned from the use of common property between income earned by lot owners when the use of the common property is connected to the use of their strata lot [as in a conventional apartment lease] and income earned by the strata building from the income earned by using the common property independently of a strata lot or lots [like in a telecommunications tower lease].
Those distinctions align with the concepts of mutual and non-mutual receipts or income in strata buildings.
The principle of mutuality for tax purposes is based on the idea that you cannot derive income from yourself [as it’s illogical]. So strata owners do not collectively earn money from themselves via the strata corporation when it’s paid by them as part of their strata ownership relationship.
So, mutual receipts or income is money received commonly by, from, or, for all strata owners to the common fund, in relation to their common obligations and/or in their capacity as strata building members [like strata levies or interest imposed on strata levies].
Mutual receipts or income is not treated as income for tax purposes, so there’s no tax payable on it by the strata buildings or the strata owners.
Non-mutual receipts or income is other money received by the strata building from non-strata owners and also from strata owners when the mutuality principles do not apply.
So non-mutual receipts or income to strata buildings is assessable income and tax is payable on it.
But, applying the mutuality principles can get a bit tricky as the following examples demonstrate.
Strata levies are mutual income.
Income earned by strata buildings for the use of common property will be non-mutual income [such as leasing common property to telcos, licensing common property, charging for use of facilities and equipment, etc].
Income earned from strata owners for the use of common property is also non-mutual income, even though it comes from a strata owner.
Interest earned on money in the bank or otherwise invested by the strata building is also non-mutual income.
Fees paid for strata records inspections by strata owners are mutual income.
But, when strata inspections fees are paid by non strata owners, they are non mutual income [see paragraph 31 of TR 2015/3].
Penalties paid to the strata building under tribunal orders are non mutual income [see paragraph 28 of TR 2015/3].
So, the application of the tax rules is irregular and not what most strata stakeholders expect.
STRATA OWNER TAX LIABILITIES & DEDUCTIONS
This unusual application of tax rules in strata buildings doesn’t end there, because not all non mutual income receipts are taxable in the hands of the strata building.
Rather, some money received by strata buildings is treated as income in the hands of strata owners and assessable for tax against them personally instead.
TR 2015/3 describes that scenario as follows:
Income from the use of the common property is not assessable income of the strata building.
Rather, it is assessable income of the individual strata owners.
That is so even if the strata owners do not and cannot receive the income [which is usually the case] as it is held by the strata building.
Similarly, strata buildings are not entitled to any deductions in respect of common property or common property derived income.
Strata owners will be entitled to those deductions in respect of common property derived income instead.
Strata owners are treated as receiving and can utilise income and deductions in respect of common property derived income in proportion to their strata lot entitlements.
This unusual outcome [where money earned by the strata building is kept by it but the strata owners pay tax on it] occurs because those strata owners receive a benefit against the amount needed to be levied on the proprietors by the strata title body as contributions to the administrative or other funds.
The classic scenario used to illustrate is the rent earned from a telecommunications lease of the strata building rooftop as follows.
A telco pays the strata building rent.
The rent is kept by the strata building and used to pay operational expenses [or for capital works if transferred between funds].
Strata owners’ levies are reduced and less as a result.
The strata building does not pay tax on the telco rent.
The strata building cannot claim deductions for any costs associated with earning the telco rent.
Strata owners should include part of the rent [based on their proportionate strata lot levy entitlements] in their assessable income for that year.
Strata owners can deduct part of any costs associated with earning the telco rent.
So, it’s all pretty simple.
But I’d be very surprised if it’s happening in most strata buildings due to a lack of awareness and understanding, non-disclosure of the non-mutual income to strata owners by strata buildings, commercial [and cultural] incentives towards non-compliance [and tax avoidance], and low or non existent tax enforcement.
A FEW OTHER LESS COMMON STRATA TAX ISSUES
There are also a few less common, more complex and even less understood tax issues in strata buildings as follows.
Capital gains
Like income, any capital gains earned by a strata building from the sale or other use of common property is taxable under the mutuality principles in the hands of the strata owners.
So, if a strata building sells part of the common property to a neighbour, developer or lot owner or receives a payment for granting exclusive use of the common property, that money is a capital gain by all the strata owners.
Exactly how the capital gain affects each strata owner will depend on their personal tax circumstances and is beyond the scope of this article.
Depreciation
Depreciation can be claimed as a deduction against associated income by many owners of real estate on newly built structures at attractive and sometimes accelerated rates. That includes new strata buildings and capital improvements in existing strata buildings.
Typically, these deductions are only available to investor owners and like non-mutual common property income and gains, are attributable to strata owners according to their proportionate lot entitlements.
GST
Capital gains tax is another quirky area for strata buildings that operates as follows.
All strata buildings carry on an enterprise for GST purposes and so can register for GST.
If a strata building’s annual turnover exceeds $75,000, it must register for GST.
If registered for GST, then all fees and charges by a strata building for services must include GST.
Strata levies are considered to be a taxable supply by the ATO [which has always seemed weird and illogical to me] and so must also include GST.
As a result of strata levies being liable for GST, strata buildings can claim input tax credits for payments relating to maintaining and administering the common property.
Strata owners who are registered for GST and make strata levy payments as part of that enterprise can claim input tax credits for their strata levy payments.
An interesting anomaly of these strata GST provisions that has bugged me and some of my strata friends is that whilst water rates are GST free or exempt throughout Australia, when a strata building levies strata owners for amounts that include payments for water rates, GST is added to them. So, strata buildings and strata lot owner pays GST on water when no one else in Australia does or should.
More detailed information about GST in strata buildings can be found in GSTR 2000/37.
Defect repairs & combustible cladding works
Money paid by investor strata owners to strata buildings for repairing defects through strata levies is deductible against income and not as a capital expense.
However, the money paid to fix combustible cladding can only be claimed as a capital deduction over 25 or 40 years.
More detailed information about those two specific matters can be found here.
CONCLUSIONS
I’m not surprised that most strata stakeholders are very unaware of tax rules and how they work in strata buildings. These rules are detailed, complex, boring, and illogical.
And, I expect that tax compliance levels are also relatively low.
But, given the significant amount of money passing through Australian strata buildings each year [many billions of dollars] non-compliance mean lost tax revenue that should be paid by many strata buildings and strata owners as well as tax deductions that are no being claimed by investor strata owners.
So, strata tax related information and services to strata buildings, strata owners and investors seems to me to be another necessary and worthwhile area to focus on.
March 13, 2025
Francesco …