Edited version of private ruling

Authorisation Number: 1011539352174

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Ruling

Subject: On-charging of body corporate fees

Question

Is GST applicable when you on-charge items such as council and water rates to members of the body corporate who are the apartment/unit owners?

Advice/Answers

Yes. The on-charging of items such as council and water rates to the owners/members is subject to GST where you make the supply in your own right. Please refer to 'Reasons for decision' for a detailed explanation.

Relevant facts

You manage the high rise apartment building identified in a specified building plan as a body corporate entity.

You are registered for GST.

The apartment building is located in an Australian state or territory and is governed by the relevant state strata title act.

You currently charge GST on your levies to members/owners.

Part of your expenses relate to items such as council rates and water rates which are not subject to GST. When these costs are on-charged, either directly or through the levies, you add GST to the amount payable. In the case of Council and water rates there is no GST included in the charge to you.

You contend that this is unreasonable and seek the Australian Tax Office (ATO) view in writing. Some of your body corporate members have complained about the disparity in their payment of GST for such, otherwise, GST-free items.

You further contend that a body corporate is merely an agent for the collective unit owners or an association of members and that the 'law of agency', the 'principle of mutuality' or the 'application of reimbursement' should apply so that the components of each body corporate levy that relates to GST-free items are charged GST-free to the members of the body corporate. To achieve this and ensure more transparency, you are proposing a change in the format of your tax invoice to show exact reimbursement of each relevant GST-free item in the invoice.

Reasons for decision

GST is payable on any taxable supply that you make. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if: 

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with Australia, and

(d) you are registered, or required to be registered. 

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case you are carrying on an enterprise in Australia, you are registered for GST and your supply is neither GST-free nor input taxed under any provisions of the GST Act. Therefore, your supplies are taxable supplies and you are liable to pay the GST on the levies if the supplies you make are linked to the consideration you receive.

We will therefore look at the supplies you make and the consideration you receive.

Supply for consideration

The existence of a 'supply' itself is an essential element in determining whether a transaction is a taxable supply under section 9-5 of the GST Act.

As a body corporate, you are an entity separate from the owners. The supply you make to the owners is the entry into an obligation to maintain and manage the complex in a sound condition. This comes within the definition of supply contained in the GST Act under section 9-10 which discusses the meaning of the word 'supply' for GST purposes.

Paragraph 9-10(2)(g) of the GST Act provides that a supply includes:

an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation.

You charge a levy to the unit owners to cover expenses incurred in carrying on your enterprise of the body corporate. The payments from the owners to you can be consideration for supplies you make to the owners.

Based on the information you have provided, you incur in your own right, amongst other things, the expenditures for council rates and water rates, electricity and maintenance services. That is, the supply is made to the body corporate entity not to the owner /member.

Some, or all, of these supplies to you may not be subject to GST in so far as they relate to the transaction between the supplier of these services and you. This is because they are GST-free or they are a 'tax, fee or charge' that is listed in the Treasurers Determination and covered by Division 81 of the GST Act. (Note: under subsection 81-5(2) of the GST Act the payment of any Australian tax, fee or charge that is specified, by legislative instrument, by the Treasurer, or the discharging of a liability to make such a payment, is not the provision of consideration. Consequently the payment is not consideration for a taxable, GST-free or input taxed supply).

These services are supplied to you to enable you to perform your obligations to the owners. The amount you pay to the service provider in relation to these expenditures is a business cost similar to other acquisitions that you make.

When you on-charge the above expenditures to the owners, GST is payable by you on any amount paid by the owners. This applies whether the amount is separately itemised or included as part of the overall levy. This is because the amount received to cover the above expenditures is part of the consideration for the performance of your obligations to the owners. As a general principle, the on-charging of a GST-free acquisition or an Australian 'tax, fee, or charge' that is listed in the Treasurers Determination will not be covered by Division 81 and will be subject to GST. This is because the GST-free acquisition or the 'tax, fee, or charge' that is on-charged by you to the owners is no longer a GST-free acquisition or a 'tax, fee, or charge'.

The fact that the cost may be identified on your invoice as a GST-free item or as a 'tax, fee, or charge' does not alter the fact that it is an on-charged business cost to you, the supplier. The recipient of the supply (the owner) is not paying for a GST-free item or a 'tax, fee, or charge' to you, rather the recipient is paying you for the supply of services that you make to them.

As a consequence, you are making a taxable supply when you on-charge to your 'members', amongst other things, items that are not subject to GST because they are GST-free or are in terms of Division 81 of the GST Act and are listed in the current Treasurers Determination. This may include such items as water and council rates.

Agency / Reimbursement:

You have contended that a body corporate is merely an agent for the collective unit owners or association of members. As such you would be acting as an agent for your members and that the members may have to reimburse you for expenses incurred on their behalf. These expenses may include 'taxes, fees, or charges' that are included in the Treasurer's Determination as not being subject to GST or may have been GST-free supplies to you. When the member reimburses you for your expenses, costs covered by the Treasurers Determination or GST-free items would not attract the GST.

For this to apply there must be a true principal/agent relationship between you and the owner. That is, the supply must be made by the utility (water corporation) or local council (rates), supplier etcetera to the owners and not to you. This is a question of fact.

For instance in the situation where a supply is made to the owners, it is the owners who will be liable to make the payment to the utility or council. If the payment remains outstanding the owner will be responsible.

Goods and services tax ruling GSTR 2000/37 which is about agency relationships and the application of the law discusses agency relationship and disbursements at paragraphs 48 to 54. While the example given relates to a solicitor and client we consider that the same principles apply in your case. That is, if you are merely a paying agent then there is not a GST liability between you and the owners. However, where the supply is made to you as the body corporate in your own right then any such supplies on-charged to the owners will be taxable. Paragraphs 48 49 and 54 are set out below as a summary of the position found in GSTR 2000/37.

Agency relationship and disbursements

48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client.

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor (see Rowe and Maw v. Customs and Excise Commissioners [1975] 2 All ER 444).

Example 10

54. A law firm acting for a client charges the client for costs incurred in providing a legal service and receives a fee for its professional services. The firm acts as a paying agent for the client with respect to the outgoings which the client is legally obliged to pay (such as the payment of land taxes and court costs) for supplies made to it. However, an agency relationship generally does not apply to those circumstances where the law firm provides a legal service for a client, pays for taxable supplies on its own behalf and then charges the client for those expenses (such as photocopying and telephone calls).

In our opinion, the information you have provided lends support to the conclusion that it is unlikely that a true principal/agent relationship exists between you and the owners/members. However, this is a question of fact for you to determine.

Principle of mutuality:

You also enquired as to whether the principle of mutuality will apply.

As a general principle, where a number of people contribute to a common fund and the fund is controlled by them for a common purpose, any surplus arising from the use of that fund for the common purpose is not income; nor, if that surplus is distributed to the contributors, does that surplus have the character of income in the member's hands.

In your case you are not a common fund for members to contribute to but a separate legal entity from your 'members'.

Furthermore, we consider that the principle of mutuality only applies to Income Tax Law and not to GST Law.

Section 9-20(3) of the GST Act has direct relevance to your contention and provides that:

(3) For the avoidance of doubt, the fact that activities of an entity are limited to making supplies to members of the entity does not prevent those activities:

(a) being in the form of a business within the meaning of paragraph (1)(a); or

(b) being in the form of an adventure or concern in the nature of trade within the meaning of paragraph (1)(b).

Paragraph 9-20(1)(b) of the GST Act describes an enterprise as being an activity or series of activities "in the form of an adventure or concern in the nature of trade".

Conclusion:

A body corporate is considered by the Commissioner of Taxation to be an entity that is carrying on an enterprise which makes supplies for consideration. The entity is required to be registered where it meets the registration threshold (currently $75,000 or $150,000 if you are a non-profit body) but may elect to be registered if it is under the threshold.

The fact that as the supplier, the body corporate, is an entity of which the recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment made by the recipient from being consideration. Therefore, a payment from an owner to a body corporate can be consideration for a supply made by the body corporate to the owner. Therefore, your supply of body corporate services to the owners/members is a taxable supply that is subject to GST.

Subject to the above, the body corporate will be liable for GST of 1/11^th of the levies collected in respect to the services it provides to its members

The liability to pay the GST rests with you as the supplier, not on the owners. You are still liable to pay the GST to the Australian Tax Office (ATO) even if you do not include a GST component in the amount you charge to the owners.

However if you are merely a paying agent in regards to the council rates and water supply etcetera then there is no GST liability between you and the owners. However, where the supply is made to you as the body corporate in your own right then any such supplies on-charged to the owners will be a taxable supply.

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