Last week we wrote about the clever apartment owners in Bondi who sold common property air space and converted unused storerooms to saleable units, all to fund a major upgrade of their building.
It’s a terrific outcome for all concerned, but there are tax implications for the owners – and it may well be personal.
The Australian Tax Office regards owners corporations and bodies corporate as collections of individuals who share ownership rather than a company with shareholders.
And while levies aren’t considered taxable income for the strata scheme, profits or income from the sale or leasing of common property are, and a share of the latter should be declared in individual apartment owners’ tax returns.
“Apartment owners are ‘mutual owners’ of the strata title body and own the common property mutually,” says property lawyer and tax expert Tony Cordato. “As a result, strata levies are not treated as assessable income of the strata title body for income tax purposes.
“However, income from common property is treated, not as mutual income of the strata title body, but as assessable income of the individual owners.”
In other words, unless your accountant has a clever plan, the tax office will expect you, individually, to declare your share of any income accruing to the strata scheme, based on your unit entitlements, albeit with deductions allowed for expenses as well as, possibly, depreciation.
All of this is covered in an ATO ruling (TR 2015/3) in which recognises that different states treat strata owners, collectively, in different ways.
In some states, like NSW, owners corporations are effectively collections of owners, in others they are more like corporate entities.
And there are also significant differences in different states when it comes to returning excess funds back to owners. In NSW, for instance, it takes a unanimous vote of owners to agree to excess funds being paid back to owners – a highly unlikely outcome.
Faced with this maze of state-based regulations, the ATO decided that, since owners in any strata scheme, anywhere could theoretically receive a share of the sale of their apartment block, then we are all to be regarded as individuals who share ownership, rather than company shareholders.
Thus, if your strata scheme has any income from anything apart from levies, someone – probably your strata manager or the scheme’s accountant – should be calculating a figure that you should declare on your annual tax return.
In the ATO ruling, the list of taxable income includes fines received for breaches of by-laws, interest and dividends from invested funds, and rent from leasing common property, including to businesses operating in your building.
In the case of an upgrade under the NSW strata redevelopment laws, that could be capital gains, minus expenses and depreciation, apportioned on the basis of your unit entitlements.
Do all strata owners declare this kind of income? No, because many of us, and our strata committees, wrongly think that any money that comes in and immediately goes back out for admin and maintenance expenses isn’t taxable.
But those outgoings would normally be financed by your levies, so the income saves you money and the tax burden is supposed to be divided among the owners.
Strata schemes are great tax avoiders. Some store their cash reserves in accounts that don’t earn any interest because the cost of filling in a full tax return, rather than a simple “zero income” declaration, would often outweigh the meagre interest they would earn, especially these days.
But even if there is a tax component, the strata redevelopers of Bondi and elsewhere in NSW have done well.
They just have to hope that this unexpected, unseen, untouchable income doesn’t push them over their upper limits for tax brackets, pensions and other benefits.
A version of this column previously appeared in the Australian Financial Review.