Edited version of private advice

Authorisation Number: 1051530796621

Date of advice: 26 June 2019

Ruling

Subject: CGT and goods and services tax implications in relation to granting of rights to common property

Question 1

Is the granting of exclusive rights of usage of areas of the common property for the purpose of courtyards for residential purposes for a monetary value subject to goods and services tax (GST)?

Answer 1

Yes

Question 2

Does the monetary consideration for the granting of exclusive rights of usage of areas of the common property for the purpose of courtyards for residential purposes constitute ordinary assessable income for the body corporate?

Answer 2

No

Question 3

Does the granting of exclusive rights of usage of areas of the common property for the purpose of courtyards for residential purposes give rise to a Capital Gains Tax (CGT) event for the body corporate?

Answer 3

No

This ruling applies for the following period:

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2018

Relevant facts and circumstances

A body corporate company was registered before 20 September 1985. The building was built the same year.

Proposed by-laws will give rise to a single lump sum payment by the owner a number of lots to the body corporate for being granted exclusive rights of usage of the area at the back of the respective lots with specific conditions.

You provided a copy of the motion related to the grant of exclusive right of usage of common property to the respective lot owners.

The body corporate does not pay distribution to its members but reduced levies payable by any surplus made. No part of the payment will be received by the owners.

The Body Corp is registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 Part 3-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Division 40

A New Tax System (Goods and Services Tax) Act 1999 paragraph 184-1(1)(b)

Reasons for decision

Good and Services Tax

GST is payable on taxable supplies. Under paragraph 9-10(2)(e) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) a supply includes a creation, grant, transfer, assignment or surrender of any right. Therefore, the granting of an exclusive right of usage of part of a common property would fall within the definition of a supply under the GST Act.

Section 9-5 of the GST Act states: You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(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.

(*denotes a defined term in section 195-1 of the GST Act)

For the granting of the exclusive rights of usage of part of the common property to be a taxable supply, all of the requirements listed in section 9-5 of the GST Act must be satisfied.

Even though you are an entity of which the recipient of the supply is a member, and you make supplies to your members, this does not prevent the payment made by the recipient to you from being consideration. Therefore, a one off payment from a lot owner to you is consideration for a supply made by you and paragraph 9-5(a) of the GST Act is satisfied.

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 the different State Acts governing strata title schemes they generally 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.

The ownership of the common property varies under different State Acts and Territorial Ordinances. Although the ownership of the 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 your case the granting of the exclusive rights of usage of part of the common property by way of a by-law is a supply that is made by the body corporate not by the individual owners.

Section 9-20 of the GST Act states:

(1) An enterprise is an activity, or series of activities, done:

(a) in the form of a *business, or

(b) in the form of an adventure or concern in the nature of trade; or

...

The activities of a body corporate would be considered to fall within paragraphs 9-20(1)(a) and/or 9-20(1)(b) of the GST Act. The fact that the activities of the body corporate are limited to making supplies to its members does not prevent those activities being in the form of a business or in the form of an adventure or concern in the nature of trade.

As such, the granting of the exclusive rights of usage of part of the common property will satisfy the requirement of paragraph 9-5(b) of the GST Act.

Since the strata scheme is located in an Australian state, paragraph 9-5(c) of the GST Act is satisfied as the supply of the rights is connected with Australia.

As mentioned above, paragraph 9-5(d) of the GST Act provides that a supply will only be a taxable supply where you are registered or required to be registered for GST. You confirmed that you are registered for GST and your turnover is above the registration turnover threshold and therefore paragraph 9-5(d) of the GST Act is satisfied.

The supply of the exclusive rights of a part of the common property to one of your members would therefore be subject to GST.

It is not considered that the supply of the exclusive rights of usage would be GST-free under Division 38 of the GST Act or input taxed under Division 40 of the GST Act.

Income Tax

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Under section 6-10 of the ITAA 1997, assessable income also includes statutory income.

The Commissioner's view on the assessability of money contributed and received by proprietors/members of a strata title is set out in Taxation Ruling TR 2015/3 Income tax: matters relating to strata title bodies constituted under strata title legislation (TR 2015/3).

The assessability of moneys received in respect of the common property varies according to the relevant State strata title legislation. In a relevant State, the ownership of common property is vested in the body corporate as agent for the proprietors as tenants in common in proportions equal to their lot entitlements.

When determining if the income received in respect of common property is assessable to the proprietor we must consider the principles of mutuality. A mutual receipt is not ordinary income or statutory income. Therefore, the mutual income of a body corporate or its members is not assessable income.

The principle of mutuality applies when a number of persons associate together for a common purpose and contribute to a common fund in which all are interested. The principle of mutuality recognises that one cannot make a profit out of oneself and that income can only be derived from sources from outside oneself. This principle does not extend to include income that is derived from sources outside that group.

For mutuality to apply there must be complete identity between the contributors to the fund and the participants in the surplus (Municipal Mutual Insurance Ltd v. Hills (1932) 16 T.C. 430). This does not mean there must be individual identity between contributors and participants, but in the identity as a class. Although not all owners pay the levy, this is not crucial to the mutuality principle (Royal Automobile Club of Victoria v. FC of T 73 ATC 4153; (1973) 4 ATR 567).

The Court in Federal Commissioner of Taxation v Australian Music Traders Association (1990) 90 ATC 4536 supported the principle that there must be a reasonable relationship between contributions and benefits. Any surplus becomes part of the body corporate general funds and thus the recipients are the members of the body corporate. Consequently, a reasonable relationship exists between the contributors and the participants in any surplus.

The Commissioner accepts that amounts, contributed by the owners in a strata plan to the body corporate in respect of special levies, are not assessable income.

In your situation the contributor of the special use levy is a strata plan member in their own right and the recipients of any surplus will be strata plan members acting in their own right. As there are no third parties involved or none of the members are acting in any capacity other than as members in the strata plan the derivation of income is considered to be from inside the group.

Although not all proprietors contribute to the special levy for exclusive use of the area, the class of contributors and participants are the same. The contributors and participants in any surplus are the proprietors.

The mutuality principle will apply to the special use levy raised in relation to the grant of exclusive use of common property by the respective lot owners.