Private ruling: Whether the body corporate is a small business entity entitled to the company tax rate
Date of advice: 10 February 2017
Published: July 2017
Ruling period: Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the body corporate a small business entity and therefore entitled to pay company tax at 28.5% on its taxable income under subsection 23(2) of the Income Tax Rates Act 1986 ? | A1: No.

Relevant facts and circumstances: The body corporate: ● Prepares budgets annually ● Prepares financial statements monthly ● Reconciles bank statements daily ● Provides services to its members ● Has commissioned a sinking fund forecast plan which itemises future expenditure over XX years ● Has entered contracts in its own name ● Has a management committee which conducts meetings in accordance with statutory requirements ● Manages the day to day operations of the scheme and regularly organises repairs and maintenance for the residence and the common property The vast majority of the income received by the body corporate is mutual income. The only non-mutual income is from rent, interest and dividends. Rent is received from the scheme caretaker in relation to the games room. The body corporate organises repairs and maintenance services and operates on a break-even basis. The body corporate does not have a strategy to make profit. The body corporate has a sinking fund forecast which is made available to the body corporate; the information is required to set sinking fund contributions for the next XX years. The body corporate is governed by a set of by-laws.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-110 | Income Tax Rates Act 1986 Subsection 23(2)

Reasons for decision: Summary: Subsection 23(2) of the Income Tax Rates Act 1986 states the rate of tax in respect of the taxable income of a company is: a. if the company is a small business entity for a year of income - 28.5%; or b. otherwise - 30% Subsection 328-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states you are a small business entity for an income year ( the current year ) if: (a) You carry on a business in the current year; and (b) One or both of the following applies: (i) You carried on a business in the income year (the previous year ) before the current year and your aggregated turnover for the previous year was less than $2 million; (ii) Your aggregated turnover for the current year is likely to be less than $2 million. Taxation Ruling TR 97/11 discusses whether a taxpayer is carrying on a business of primary production. The factors used in TR 97/11 have been extrapolated from common law cases and can be used for activities other than primary production. The factors used to decide if a business is being carried on are: 1. Whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators 2. Whether the taxpayer has more than just an intention to engage in business 3. Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity. Where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business 4. Whether there is repetition and regularity of the activity 5. Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business 6. Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit 7. The size, scale and permanency of the activity 8. Whether the activity is better described as a hobby, a form of recreation or a sporting activity. The role of a property body corporate is to administer common property and body corporate assets for the benefit of all of the owners, and to undertake functions required under body corporate legislation. More specifically a body corporate: ● maintains, manages and controls the common property on behalf of owners ● decides the amounts to be paid by the owners to make sure the body corporate can operate ● makes and enforces its own rules, called by-laws, which tell owners and other people who live in the scheme what they can and cannot do ● takes out insurance on behalf of owners, such as public risk insurance over the common property and building insurance ● manages and controls body corporate assets ● keeps records for the body corporate, including minutes of meetings, roll of owner's details, financial accounts, registers of assets, improvements to common property by owners, engagements and authorisations. It is clear that the role of a body corporate is to manage common property and lot owner's funds, its role does not include activities which are necessarily profit-driven. In application to your case the body corporate does have a set of by-laws but does not have a business plan. A business plan is relevant in establishing that there is an intention to make a profit. You have stated that the body corporate organises repairs and maintenance services and operates on a break-even basis. The body corporate does not have the intention of making a profit; therefore the body corporate does not have a purpose of profit. However there may be minor consequential profit made from non-mutual items such as rent, interest or dividends. Even though the body corporate does conduct activities which are usually indicative of operating a business such as keeping books of account, and carrying on its activities in a systematic and organised manner, these activities would ordinarily be expected of a body corporate entrusted with lot owner's funds. The carrying out of these factors is not necessarily directed at making a profit and consequently doesn't point towards the running of a business. The overall impression gained from the given facts, and the factors outlined above, is that the body corporate is not operating a business because it receives minor passive income from non-mutual sources and there is no profit intent or activity. As it is not operating a business it is not a small business entity. As it is not a small business entity it is not entitled to the reduced rate of company tax of 28.5%.