Chapter 2 The strata sector
2.4 Corporation differences
Corporations holding non-profit status for Goods and Services Tax (GST) registration purposes with the ATO, are eligible for the higher $150,000 threshold where they do not intend to distribute any non-mutual income. ATO ruling IT 2505 was provided in 1989 to clarify the tax treatment of income of owner corporations as constituted under the various state and territory laws (ATO 1986) This ruling
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took the view that owner corporation income from its members (typically strata levies) was mutual income and therefore not taxable in the hands of the owner corporation. However income derived from common property (e.g. parking, gym hire) was a taxable event though it was used solely for the upkeep of common areas. The ruling applied the principles of mutuality and determined that non- mutual income is taxable in the hands of individual members or lot owners rather than the owner corporation itself, creating a tax burden for many owners who may remain unaware of the ATO‟s reportable requirements.
The ruling essentially means that even though profits may never be distributed to the owners, the owners are still required to declare non mutual income generated from belonging to the owner corporation. This inconsistency comes about because
„relevant state and territory legislation provides that a body corporate can make distributions to its proprietors in certain circumstances‟ contrary to TD 93/73 (www.ato.gov.au/rulings accessed 11/4/2011).
The effect of the ruling is to require larger owner corporations to provide an annual income statement to each member for their use in end of year financial statements. The owner is then required to declare their share of the net income for taxation purposes, regardless of whether there has been any actual distribution. The ruling is of particular concern to those owners who have bought into owner corporations such as retirement villages and who are on fixed incomes and reliant on pensions, as they need to declare this income, even though it remains within the sinking funds of the owner corporation. It provides an intricate set of reporting requirements for the owner corporation, and a considerable impost on both the time and expertise of the organisation.
The ruling in relation to tax declaration are complex and because of the distribution of funds requirements may act to limit the amount of income sought by owner corporations through rental of common property to outside agents. The key element here is the distribution of non-mutual income. This may occur from time to time, when funds have been raised for a specific upgrade that does not eventuate, or when the owner corporation scheme is being wound up. The funds distributed in this way are not considered exempt from non-profit status and remain taxable against each owner‟s income. It is increasingly a worry for owners of strata titled
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property nearing the end of its' useful life3. This is because as Easthope et al. (2013) note, the proposed introduction of demolition4 clauses into the legislation where enacted, will trigger the distribution of commonly held funds amongst all owners. Larger, declarable lump sum payments to individual owners will be the result.
Other factors arising out of, and affecting, the income for owners include the inability to access various low income subsidies. This situation is bought about because many invoices, such as water and electricity, are not in the individual owner‟s name, but remain in the name of the owner corporation with each owner paying a percentage of the quarterly statement. Though Altmann (2013) also notes that owner corporation have been excluded from key federal government subsidies for environmental sustainability upgrades.
Company law and the concept of corporation are anomalies for the owner corporation. Owner corporations do not wholly fall within the non-profit sector either, since the tax exemptions are only partial. The effect of these exemptions from normative corporation, tax law and government funding, is that effectively no requirement exists for external auditing of the organisation either in terms of financial rigorousness, operational systems or procedural fairness, despite holding increasingly large sums of community funds and being responsible for significant assets. Without this oversight how does governance work within owner corporation?
Strata managers where appointed, have a role to play as they undertake the administrative, secretarial and financial duties on behalf of all owners. The complexity of financial relations differs in company and non-profit law. Taxation issues create a complex system that strata managers may be asked to advise on and administer. The myriad relations between the many different stakeholders create complex relationships for both the strata manager and the committee of management leading to the question of how owner corporations govern within such complex systems?
The role of the strata manager under such circumstances should become a key stabilising factor for committees of management, not only because of their
3
See Johnston and Reid (2013) for a full discussion of life cycle costing relevant to the strata industry.
4
Demolition clauses are currently under consideration in New South Wales. The introduction would allow owners to vote to demolish their building rather than continue to maintain it once it had reached the end of its’ useful life. The attached owner corporation would be extinguished at the time the building was demolished.
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specialised knowledge but also because their role may provide continuity within which history of the owner corporation resides. Johnson and Scolley (2001) state that personnel changes concurrent with council elections means that the entire council membership can change from one year to the next. As a result many voluntary organisations experience little growth towards maturity or fully functioning teams (Weiss 1993). External pressure can be bought to bear on some non-profit boards to function effectively through the withholding of government funding. This type of external pressure is missing from the owner corporation environment at present.
Saidel and Harlan (1998, p. 224) report that most non-profit organisations apply patterns of governance in which governance challenges are met by the organisation‟s executive staff as well as the board. Leading the board is a central role for non-profit executive officers and the CEO (Drucker 1990; see also Fletcher 1992). The executive or manager‟s role then is to guide the board into appropriate decision making where boards lack expertise (Miller 2002). Within the owner corporation environment, the committee of management consisting of real property owners acts as the board, whereas the strata manger takes the role of top management or executive through an outsourced, contract based mechanism. Muetzelfeldt (1998) reported that contract mechanisms within the non-profit sector had had considerable impact for Australian organisations. Adversarial tendering processes are commonplace within the non-profit sector as is increasing reliance on outside „specialist knowledge‟.
It remains the duty of the committee of management to monitor the strata manager to ensure that the interests of the owners are protected. Members or owners are more vigilant in monitoring their interests and the interests of the organisation (Mwenja & Lewis 2009). However, the literature relevant to owner corporations suggests that boards are plagued by conflict between individual needs and collective action for the good of all owners. These findings fit with Green and Griesinger‟s (1996) view that non-profit board members have difficulty in clearly identifying who they are accountable to and sometimes suggest that they are accountable to themselves. The outcome is poor trust levels and lower participation rates leading to lower governance outcomes. Low levels of trust and participation leading to lower governance outcomes have been identified within owner corporation (Blandy 2010; Goodman & Douglas 2010; McKenzie 1996).
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Bebbington and Gray (2005) find it difficult to define measures of accountability and transparency within non-profit organisations though they play an important part.