Edited version of your written advice

Authorisation Number: 1012982625489

Date of advice: 9 March 2016

Ruling

Subject: Income as an agent

Question 1

Are income and expenses relating to the common property which were incurred by you, as the agent for the body corporate, considered your income and expenses for taxation purposes?

Answer 1

No.

Question 2

Is the income received by you, as agent for the body corporate, excluded from the calculation of your annual turnover when determining your status as a small business entity?

Answer 2

Yes.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2014

Relevant facts

You carry on a professional strata management business.

You have an ongoing contractual arrangement with a body corporate.

This body corporate is an aged care facility consisting of independent living unit.

The aged care facility has supported residential suites and the privately owned independent living units.

At the time of the establishment of the facility you entered into a management agency agreement with the body corporate.

This agreement appointed you to act as agent of the body corporate in connection with the management, and administration of the property and the exercise and performance of the powers and duties of the body corporate. The agreement also confirmed your ability to employ people and to use and manage the common property.

From time-to-time you enter into a management agreement with a new owner of one of the individual independent living units when it changes hands.

This agreement includes the following clauses:

• The Management Company has agreed to manage and administer the facility on the terms and conditions contained in the Management Agency Agreement (i.e. as agent).

• The management company as agent for the owner carries out all the obligations of the owner as a member of the body corporate.

• The agreement sets all the activities the management company will undertake to maintain the common property and pay ongoing expenses.

• The owner of an independent living unit pays an Estimated Body Corporate fee which is the owner's portion of the estimated total expense and outgoings of the common property, to the Management Company.

• The resident of an independent living unit pays a Body Corporate Fee which is the resident's portion of the actual total expense and outgoings for the facility, including expenses incurred on common property.

• Generally, expenses and outgoings in respect of the common property are paid by you and reimbursed by the owner of each unit by way of payment of the Estimated Body Corporate Fee.

• You do not receive a management fee for your services.

• In consideration of the management company managing the facility you receive a Deferred Management Fee from an owner upon the sale of their unit.

You have incurred expenses and outgoings in relation to the common property of the body corporate in your capacity as agent for the Body Corporate and you received corresponding reimbursements from the Body Corporate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 328-120

Reasons for decision

Whether an agency relationship exists is a question of fact determined by, among other things, any relevant documentation about the arrangement, the description used by the parties and the conduct of the parties.

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.

Generally, these powers include 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 and to levy proprietors and to deposit these levies in nominated funds.

In your case, the body corporate entered into a contract to appoint you to act as it's agent in the performance of its duties and functions. This agency relationship is confirmed in the contract entered into with each of the individuals making up the body corporate when a unit changes hands.

Generally, you pay for the expenses and outgoings in respect of the common property. You receive an estimated body corporate fee from the owner of each unit. This fee is collected on behalf of the body corporate and is used to reimburse you for the common property expenses and outgoings.

You receive additional income in the form of a deferred management fee. This is levied as a percentage of the sale price of a unit at the time when it is bought and sold.

GSTR 2000/37 is a tax ruling that looks at application of agency relationships in detail and can be used to provide guidance in determining whether there is an agency relationship in your circumstances.

In paragraph 28 there are factors that indicate an agency agreement:

• any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

• any exercise of the authority that you are given to enter into legal relations with a third party;

• whether you bear any significant commercial risk;

• whether you act in your own name;

• whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

• whether you decide the price of things that you might sell to third parties.

Paragraph 34 explains that a clause in an agreement which states that an agency relationship exists must be considered with all the other terms of the agreement.

In your case, based on the facts and considering GSTR 2000/37, it is considered that there is an agency relationship agreement between yourself and the Body Corporate in relation to management of the common property of the Body Corporate.

The common property expenses and outgoings which are incurred are considered to be those of the Body Corporate. Similarly, the Estimated Body Corporate fee received from the individual unit owner's is income of the Body Corporate and not yourself.

The reimbursement of the common property expenses and outgoings are not considered to be income.

Small Business Entities

Division 328 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for the meaning of a small business entity relevant for the entity to access various tax concessions available in the tax legislation. In determining whether an entity meets the criteria necessary to satisfy the definition of a small business entity, subsection 328-110(1) provides that consideration of the entity's aggregate turnover is required.

The meaning of the term 'aggregate turnover' is provided in section 328-115 of the ITAA 1997, which broadly is the sum of the relevant annual turnovers. Section 328-120 of the ITAA 1997 provides for the meaning of 'annual turnover'. The general rule under subsection 328-120(1)of the ITAA 1997 is that the annual turnover of an entity for an income year will be the total ordinary income the entity derives in the ordinary course of carrying on its business. Consequently, in order to establish whether an entity is a small business entity it is necessary to consider what constitutes the entity's ordinary income such that its annual turnover for the relevant income year can be established.

The legislation does not provide guidance on the meaning of 'ordinary income' however, guidance its meaning can be found in case law. For instance, in Scott v. Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215, Jordan CJ held that the meaning of 'income' was to be determined according to 'ordinary concept and usages' at 219 as follows:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts: A.-G. for British Columbia v. Ostrum ([1904] AC 144 at 147); Lambe v. Inland Revenue Commissioners ([1934] 1 KB 178 at 182-3).

Application to your circumstances

You act as an agent for the Body Corporate. As a result, you do not take on the risk of the contracts entered into by the Body Corporate when it is managing its common property. The only remuneration you receive is from the sale of a unit when it changes hands and you receive a percentage of the sale price.

Consequently, the reimbursement amounts received from the Body Corporate are not considered to be income according to ordinary concepts and should not be included in determining your annual turnover for the purposes of subsection 328-120(1) of the ITAA 1997.