Private ruling: income and expenses in relation to an asset
Published: March 2014
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2008

Ruling: Q1: Are certain expenses relating to the property deductible to the owners of the body corporate against the assessable income earnt from the rental of an asset located on the property? | A1: No | Q2: Are other expenses, which are wholly related to the asset and paid by the owners of the body corporate, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: Are the owners of the body corporate entitled to a deduction under section 8-1 of the ITAA 1997 for other minor expenses? | A3: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Taxation Ruling IT 2505 outlines issues regarding bodies corporate constituted under strata title legislation. A body corporate is constituted by the proprietors but is a separate legal entity with specified powers, authorities, duties and functions. Though these powers, authorities, duties and functions vary under different State Acts, generally they include: • the power and authority to impose a levy on the proprietors, to make by-laws to carry out necessary work, to invest and to borrow; and • the duty and function to control, manage and administer the common property, to maintain properly the common property and keep it in a good state of repair, to effect insurances on the building and common property, to keep records and books of account, to levy proprietors and to deposit these levies in nominated funds. In this State strata title schemes are governed by the States Strata Titles Act. In this State ownership of common property is vested in the proprietors as tenants in common in proportions equal to their lot entitlements. Even though the ownership of common property varies between the States and Territories, the administration, control and management of that property is vested by all State Acts in the body corporate in its own right. In the discharge of its administrative and management functions, the body corporate may derive assessable income. Interest, dividends or other income derived by the body corporate from the investment of moneys held in its funds represents assessable income of the body corporate unless specifically exempted by the Income Tax Assessment Act 1997 . Expenses incurred by the body corporate that are associated with the discharge of its administrative role are deductible by the body corporate in its return of income to the extent that they are generally allowable under the Income Tax Assessment Act 1997 . Deductions for expenditure incurred would be allowed in respect of expenses that relate directly to assessable income of the type described above. Such expenses may include bank fees, depreciation of personal property and fees for preparation of income tax returns. Amounts contributed to the body corporate by the respective proprietors by way of levy or contribution and access fees paid by proprietors do not constitute assessable income of the body corporate because of the principle of mutuality. Simply stated, this principle recognises that one cannot make a profit out of oneself and that income can only be derived from sources outside of oneself. Fees payable to the body corporate by a proprietor for the collection of rents from the common property would also be non-assessable mutual income. As mutual income is not assessable income of the body corporate, amounts expended in relation to activities from which mutual income is derived do not represent tax deductible expenditure to the body corporate. Where expenditure can be apportioned between mutual (non-assessable) and non-mutual (assessable) income, for example, where management and audit fees can be attributed to investment income, the deductible portion of the expenditure is determined in accordance with the formula : ((Non-Mutual Income) / (Total Income)) * (Apportionable Expenditure) For the purposes of the formula, Total Income comprises contributors' levies plus all Non-Mutual Income and Apportionable Expenditure does not include insurance, rates and taxes, maintenance and upkeep of the grounds, building or their contents. In this case the body corporate receives income from a non-owner. This income is non-mutual income and therefore assessable. The body corporate also incurs expenses. Expenditure such as insurance, taxes, maintenance and upkeep of the grounds, buildings or their contents are excluded from what is considered apportionable expenditure (in the formula used to calculate the deductible portion of the expenditure). Some expenses are directly related to the income from the non-owner. There would be no obligation to pay these expenses but for the reason income is received therefore the full amount of these expenses can be claimed as a deduction. However, any taxes, utilities, insurance or maintenance and upkeep of the grounds, buildings or their contents are specifically excluded from being deductible. Other expenses/outgoings are considered to be of a very minor nature in relation to income from the non-owner. It is considered that it would be extremely difficult to estimate the above amounts with any degree of accuracy or certainty. In relation to these expenses the Commissioner will accept a reasonable apportionment, given their very minor nature. The reasonable estimate of these expenses should be plugged into the above formula (as apportionable expenditure). The body corporate is entitled to claim the end result as a deduction.

Relevant facts: The owners of the body corporate receive income from a building which consists of commercial suites and residential apartments. | There are common areas for which the body corporate is responsible. | The body corporate receives income from the rent of common property which is located on the building. | The renter undertakes all maintenance, repairs and insurance on the rented asset. No taxes, utilities or insurance, paid by the body corporate, relate to the asset. | The body corporate pays certain expenses specifically for the asset. If the asset was not on the company's property the body corporate would not be required to pay these certain assets.