Tax Consequences of Income from Common Property
What you need to know: Some bodies corporate receive income from a lease or licence of their common property, such as to a telecoms carrier or a commercial tenant. But individual lot owners (and not the body corporate) need to claim that income and any allowable deductions on their annual tax returns, according to their lot entitlements. This might leave your owners holding a surprise tax bill!
The ATO has recently formalised Taxation Ruling TR 2015/3 “Income tax: matters relating to bodies corporate constituted under strata title legislation”(“the Ruling”).
The Ruling consolidates and replaces a number of previous rulings and tax determinations about income tax issues that affect strata schemes. The Ruling covers many more and complex things than we can deal with in this article, but relevant here it explains how (in the ATO’s view) Australia’s tax laws apply to “income from common property”.
Super exciting, right?
Here are a few examples of how a body corporate might earn “income from common property” to supplement its administrative fund:
- roof space designated as common property may be leased to a telecommunications company to house a mobile phone tower in return for rental income;
- lots designated as common property may be let out for use as commercial premises, e.g. restaurants or shops;
- the exterior wall of a building may be made available for hire as advertising space.
The strata title legislation in each State or Territory is different in its description of how common property is held — whether by the lot owners, or by the body corporate as a trustee on behalf of those owners. This can impact on the tax treatment of income from common property in owners’ hands.
In this regard, what has changed under the Ruling is that the ATO will now apply a consistent treatment across strata schemes in each State and Territory so that (despite the differences in the ways the relevant strata title legislation describes how common property is held), lot owners can return income and claim deductions on the basis that they have the legal and beneficial ownership of the common property.
In general, the effects for lot owners is:
- income from common property is assessable in each owner’s hands, according to their individual lot entitlements — it is not assessable income of the body corporate; and
- each lot owner (and not the body corporate) can claim deductions relating to the common property (to the extent the common property is used for an income-producing purpose), again according to their lot entitlement, and subject to satisfying the other qualifying requirements in Divisions 40 or 43 of the Income Tax Assessment Act 1997.
We understand that body corporate managers will usually prepare end-of-financial-year statements to each lot owner which set out the owner’s proportions of income from common property and associated deductions. Of course, each lot owner then needs to include those amounts in their annual tax return.
If you are an owner in a scheme that is considering leasing part of its common property to a telecoms carrier shop, restaurant or advertiser, you should seek independent financial advice about the possible tax consequences that proposal might have on your personal financial circumstances.