As tax time approaches, a critical but often-overlooked issue is demanding attention from strata owners and committees across Australia. Experts warn that a widespread lack of awareness regarding strata committee tax responsibilities and the tax implications of financial decisions made within strata schemes can significantly erode owners’ return on investment and lead to substantial, unexpected tax bills.
NAT: Tax matters in strata – insights for informed decision making
The recent national webinar featuring leading strata finance specialist Paul Morton from Lannock Strata Finance and strata taxation guru Rod Laws from Tinworth & Co highlighted the urgent need for both individual owners and strata committees to meticulously factor in tax consequences when making financial decisions. They underscored that while acting in the best interests of the scheme, a strata committee may be operating without full awareness of these intricate tax responsibilities.
Understanding why strata tax affects YOU
While residential strata owners might not typically consider tax in their strata matters, and investor owners might hand it over to their accountant, both groups risk missing potential benefits or facing unforeseen liabilities if they don’t understand how strata decisions directly impact their individual tax obligations. The webinar explored the tax impact on strata funding and how it affects the cost of levies and financial planning.
Decisions made by the owners corporation/body corporate around levies and capital works can have profound tax implications for individual owners. For instance, investor owners can claim capital works deductions, but this is only permissible when the owners corporation/body corporate actually spends the funds, not necessarily when the levy is paid. Experts also cautioned against misinterpreting the time value of money, particularly when significant capital works funds are left sitting idle.
The shocking potential of individual owners receiving large tax bills
One particularly striking example highlighted by Paul Morton and Rod Laws involved income generated from common property development. They described a situation where a 124 lot scheme develops common property, such as building penthouse apartments, spends a significant amount ($20 million in the example given), and sells them for a profit ($50 million sale, $30 million profit).
In such the example, the $30 million profit could leave individual owners facing a substantial $220,000 tax bill on their share of the income. Crucially, this taxable income would typically not qualify for the capital gains tax 50% discount because the activity is considered a business enterprise, not a passive investment. The sale could also be subject to GST, further reducing the net proceeds.
Severe consequences for non-compliance
Failing to correctly account for such transactions and report your share of income to the ATO carries severe penalties. Experts stated that these can include fines up to 250% of the evaded tax. They noted that lot owners and committee members are “most likely unaware” of these potential penalties. In extreme cases of serious non-compliance, there could even be potential for jail time.
A strata committee must be aware of their tax responsibilities
The webinar unequivocally underscored that tax considerations should be a fundamental and integrated part of every significant financial decision made within a strata scheme. Experts stressed that the fundamental way an owners corporation/body corporate structures its finances – whether through accumulating capital works funds, raising special levies, or securing external borrowing – directly affects the tax deductions available to individual owners on their levies.
Committees need to gain insights into making investment decisions that fairly consider the diverse tax situations of all owners. It is crucial for owners to understand how these decisions impact their personal tax obligations and cash flow.
Seeking specialist strata tax advice is essential
Given these complexities and risks, owners and owners corporations are strongly encouraged to proactively engage with their strata committee about the tax responsibilities and, most importantly, seek independent financial and tax advice from a specialist strata tax agent who specifically understands these unique laws. This ensures they are making informed decisions that consider the crucial after-tax impact on their investments and personal finances.
This proactive approach, guided by specialist advice, is essential to protect owners’ financial interests and ensure full compliance with ATO regulations. Don’t wait for an unexpected letter from the ATO – understanding your scheme’s tax implications is a vital part of responsible property ownership.
Presenters
Paul Morton
Lannock Strata Finance
E: paul@lannock.com.au
Rod Laws
TINWORTH & CO
E: RodLaws@tinworth.com
P: 02 9922 3660
Resources mentioned during the webinar
- Taxation Ruling TR 2015/3
- WEBINAR NAT: Options for meeting financial obligations during challenging times Paul Morton, Lannock Strata Finance – Aug 2022
- WEBINAR NAT: How to get bang for your buck when planning capital works Paul Morton, Lannock Strata Finance – Feb 2024
- WEBINAR NAT: The cost of procrastination in strata. What is the true price of delay? Paul Morton, Lannock Strata Finance – Feb 2025
- WEBINAR NSW: Annual Strata Audits and Financial Statements Webinar + Q&A Rod Laws and Caren Chen, Tinworth & Co + Karen Stiles, OCN – Oct 2021
This post appears in Strata News #745.
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Read next:
- QLD: Q&A Body Corporate Financials, Audits and Tax
- NSW: Q&A Strata Accounting – Software, Tax Returns
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