Case U57

Members:
HP Stevens SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 11 March 1987.

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H.P. Stevens (Senior Member)

The question for decision in this application is whether or not the applicant has been correctly assessed upon an amount of $197 (being bank and building society interest) - reduced to $127 for taxable income - and at the rate of tax applicable to a public company.

2. In New South Wales a block of home units, where the individual owners have a separate title to their units, is covered by the N.S.W. Strata Titles Act - such providing for a strata scheme and a registered strata plan. Whilst each owner has a separate title to his "lot" - defined in sec. 5(1) of the Act - there is also an area that is not comprised in any "lot" which is known as "common property". In order for this "common property" to be looked after the Act provides for the proprietors of the various "lots" to constitute a "body corporate" (sec. 54(1)) and that such body "shall have the control, management and administration of the common property". There are detailed provisions in relation to, inter alia, meetings of the body corporate, the records to be kept by it and the supply of information and certificates by such bodies (sec. 54 to 70). There are also detailed provisions in respect of the constitution of "councils", elections to council, election of chairman, secretary and treasurer of the council, meetings, restrictions on their powers etc. (sec. 71 to 77).

3. The duties of a body corporate are set out in sec. 68 of the Act and, since it needs funds to carry out those duties, sec. 59 gives it the power to levy contribution on the individual proprietors - such may be recovered "as a debt, by the body corporate in any court of competent jurisdiction" - whilst sec. 68(j), (k) and (p) relate to such levies. When received moneys "not otherwise invested in accordance with section 65(1)(a)" must be paid "into an account established in a bank in the name of the body corporate" - sec. 68(m). Section 65(1)(a) gives a body corporate a power to invest moneys whilst (b) of the same provision allows it to borrow moneys. If a body corporate determines the moneys standing to the credit of a fund exceed the amount required for the purposes of such fund, it may "pursuant to a unanimous resolution distribute the surplus to the proprietors in shares proportional to the unit entitlements of their respective lots" - such proprietors not necessarily being the ones who contributed through levies the money involved to the body corporate. In terms of sec. 78(1) a body corporate may appoint a managing agent and may delegate to him all or some "of its powers, authorities, duties and functions".

4. Turning now to the present situation the body corporate of the strata plan covering a block of twelve (12) units received, during the substituted accounting period year ended 30 September 1983 (substitute for year ended 30 June 1983), levies of $4,396,20 and incurred expenses of $4,138.80 in relation to its administrative fund. In respect of a separate sinking fund levies of $1,199.58 were receivable whilst bank interest $146.65 and building society interest $50.04 was also received. As at 30 September 1983 the proprietors' funds as per the strata plan balance sheet were $3,766.16 (administrative fund $626.01, sinking fund $3,140.15) represented by cash on hand, bank and building society accounts $4,912.90 less accrued expenses and levies in advance $1,146.74. The return of income dated 20 October 1983 disclosed a taxable income of $127 being investment income $197 less deductions applicable to earning of interest $20 and tax agent's fee $50.

5. By letter of 20 November 1983 the applicant's representative wrote to the Commissioner in the following terms:

"I am a 71 year old Service Pensioner with no income other than the pension and own a home unit (with War Service Loan) at the above address. I have been informed by the Managing Agents of the block that the Strata Plan has to pay Company Tax (46%) on the small amount of interest the Plan

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receives on money invested which, under the Strata Titles Act we have to set aside to meet future expenditure on maintenance e.g. painting the building, re-carpeting common areas etc.

I have absolutely no chance of ever receiving a refund of this interest and even if I did it would not be taxable in my hands as, even over some years my share would not be more than $20 or $30.

This seems an incredibly unfair tax and even if it is felt that someone might take advantage of a false investment in a Strata Title surely all that is needed is a requirement to pay tax on refunds if and when they are made.

As with companies is it necessary to have a Public Officer and, if so, who appoints him and how? Can a return be lodged by a Managing Agent who has not been appointed Public Officer? There must be many other home unit owners in this same ridiculous position.

I hope you can do something about this absurd position and look forward to receiving your comment."

A reply dated 7 December 1983 advised that:

"(a) a body corporate was a company within the meaning of that term as defined in section 6(1) of the Income Tax Assessment Act;

(b) each company deriving income must be represented by a duly appointed public officer or by a duly authorised agent or attorney;

(c) it was policy to grant exemption from lodging returns of income where the income was `mutual' i.e. consists solely of members' levies and/or contributions;

(d) a return of income was necessary where there was `non-mutual' income i.e. interest on invested funds etc.;

(e) the taxable income is determined by deducting from the gross `non-mutual' income any expenses that relate directly to that income, tax agent's fees (if any) for preparation of the return of income and that proportion of other expenses which bears the same relationship as `non-mutual' income bears to the total `mutual' and `non-mutual' income;

(f) since a body corporate did not qualify as a `non-profit' company as defined in section 3 of the Rating Act it is liable to tax at the rate of 46% on its taxable income irrespective of the amount of that income; and

(g) as a matter of policy the provisions of Division 7 are not applied to bodies corporate."

6. The return of income as lodged was accepted without adjustment and on 13 January 1984 a notice of assessment issued for an amount of $58.42. By letter of 7 February 1984 the applicant's representative wrote as follows:

"I thank you for your letter of 7 December 1983 and as suggested when I phoned the number given for further information, I have awaited a reply from the Treasurer. This has been received and I enclose a copy of my reply.

In the absence of any advice from you regarding the method of appointment of a Public Officer I hereby give you notice that the Council of this Body Corporate has elected me as the Public Officer of Strata Plan... and as such I hereby lodge an objection to the assessment issued on 13 January 1984 for year ended 30 September 1983 which, under the issue date, quotes No. 353001/018.

My grounds for the objection are that the Strata Plan had no taxable income for the year stated or alternatively, that the Strata Plan is a non-profit `company'.

I would appreciate your advice as to what sections of the Tax Acts or regulations thereunder deductions set out in your letter are determined or is this another matter of policy."

This elicited a response of 1 March 1984 which set out, inter alia:

"(i) the definition of `company' in section 6(1) of the Income Tax Assessment Act;

(ii) the definition of `non-profit company' in section 3(1) of the Rating Act;

(iii) references to section 252(1) re `Public Officer', section 103A(5) re treatment as a public company, section 51(1) re allowances to the extent they are incurred in gaining or producing assessable income and section 69(1) re tax agent's fees; and

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(iv) an explanation of the principle of mutuality which does not apply to any income from the outside investment of funds by a group of people."

7. The objection contained in the letter of 7 February 1984 was disallowed by notice of 13 March 1984 and on 19 March 1984 the representative wrote in the following terms:

"I have your letter of 1 March 1984 and thank you for the explanation of the provisions of the various Tax Acts affecting the problems I have encountered. Your efforts in this regard are appreciated.

However, I find that I am even more confused, e.g.:

1. Company - I presume that because the N.S.W. Strata Titles Act refers to a home unit building as a `body corporate' we come under the definition of a company; but does a definition in a State Act necessarily apply to the Income Tax Acts in the Federal jurisdiction?

2. Public Officer - If there is no requirement in electing a Public Officer what is the position if someone gives notice he is Public Officer without authority? Who is supposed to give notice in writing of the name of the person acting in that capacity?

3. Public Company - Once again this `matter of policy' comes very much to the fore. I realise the Commissioner must try to protect the public revenue to the best of his ability within the law but when he stretches that policy to absurdity something should be done to rectify the policy. Let me give you a hypothetical and perhaps an exaggerated [sic] example but one that is by no means impossible:

• Four pensioner strata title unit holders each own a unit in a block of four. As a matter of `policy' they are treated as a public company. As you state, the `policy' is obviously used to eliminate the possibility of the need to apply Division 7 tax because the Commissioner knows full well that it could not apply to Strata Title Bodies Corporate having in mind the provisions of the N.S.W. Strata Titles Act.

I think it is high time the Commissioner had a look at the absurdity of calling (in the above example) four pensioners a public company.

4. Principle of Mutuality - Again your advice is beyond belief. Funds have to be set aside to cover future expenditure from the `sinking fund'. These are invested and interest earned of which the Commissioner says the Revenue wants 46%. Who then has to make up the 46%? Of course it is the persons who contribute to the Common Fund, whose contributions do not come within the Income Tax Assessment Act!

5. Non-Profit Company - It is quite obvious that Strata Titles are not carried on for the profit or gain of its individual members but the second part of the definition given by you makes it difficult when Strata Title Bodies are obliged by law to make a distribution possible although most unlikely except in the case of the winding up of the body corporate and when such distribution could be taxed to the extent that it applied to other than proprietors' contributions.

6. Deductions - I find this information comical in view of the above comments and as it does not answer my question regarding the method of calculating the allowable deduction. Let me say again that I very much appreciate the information given in your letter and the time your staff has spent in giving it. I say this very sincerely in the knowledge that you and the Commissioner have an extremely difficult task but I would appreciate your comments on the above matters if possible; otherwise I shall await further advice from the Treasurer and the outcome of the objection lodged to the 1983 assessment referred to."

8. By letter of 20 March 1984 the Minister Assisting the Treasurer replied to the representative who wrote to him again on 18 April 1984 stating, inter alia:

"It seems to me that there is no way a Body Corporate can be classed as a `profit' company in the true sense of the word `profit' and in this regard I draw your attention to para. 4 of my letter.

I look forward to receiving your further comment but suggest the Commissioner should change his policy and not necessarily the law.

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The Deputy Commissioner has disallowed our objection to our last assessment and as the law and the one man's, not the Parliament's policy thereunder presently stand, an appeal seems useless but the matter cannot be let stand as at present."

By letter of 10 May 1984 a request for reference to a Board of Review was lodged.

9. Further correspondence has ensued including one to the N.S.W. Minister for Consumer Affairs on 2 June 1984 which dealt with "two matters which seem most unfair to unit holders" - one was the taxation problem and the second an insurance matter viz.:

"2. Recently the ceiling in our kitchen was damaged by water coming through the roof of the building following storm damage. The Plan insurers say they are not liable for repainting the ceiling although they agree that the policy issued to the Body Corporate states that they will pay for restoration of damaged areas to a condition equal to that when new.

The insurers' reason for denying liability is that your Department has stated that `common property walls extend to their inner surface and it is considered that any paint applied to that surface does not become part of the wall, but is only placed over that surface."

The Private Secretary to the Treasurer wrote on 13 June 1984 stating:

"I refer to your further letter, dated 18 April 1984, concerning the taxation status of home unit bodies corporate registered under the New South Wales Strata Titles Act.

I am advised that the Commissioner of Taxation, whose assistance was again sought, is reviewing his policy in regard to the matters raised. You will be further advised as soon as this review is completed."

whilst the Deputy Commissioner replied on 11 July 1984 advising that it was felt the letter of 1 March 1984 "sets out in sufficient detail the provisions of the legislation within the confines of which Strata Title bodies such as your own are assessed". The representative on 2 August 1984 wrote referring to this reply and stating:

"I refer to your letter of 11 July 1984 and thank you for the information given but it seems to me the problem lies with the Tax Acts which give the Commissioner the power to make rulings whether he is right or wrong.

I have received a letter from the Private Secretary to the Treasurer advising that the Commissioner of Taxation has been asked to review the matter and make the suggestion that the absurdity of taxing non-taxpayers at 47% on Strata Title `income' could be easily overcome by amending the Tax Acts to require taxpayers to include in their Tax Return their proportion (based on unit entitlements) of any `income' from investments by the Body Corporate.

The proportion applicable to each unit owner could be very easily ascertained by the owner or by the Body Corporate and thus tax would be levied at the rate applicable to the owner and not at the Public Company rate of 47% applied to owners whether taxable or not and irrespective of the rate they would normally pay.

Again I thank you for your assistance in advising me in this matter and hope you will submit the above suggestion to the Commissioner for his consideration in his review."

10. On 3 January 1985 the Minister Assisting the Treasurer wrote as follows:

"I refer to your letter of 18 April 1984 concerning the taxation of home unit bodies corporate.

As advised on 13 June 1984, the Commissioner of Taxation is currently reviewing the taxation treatment of income derived by bodies corporate. However, due to the complexity of the matters involved I regret that the review is not yet complete.

The Commissioner assures me that as soon as the review is completed he will be in touch with you direct about the matters you have raised."

The matter was still under review when the application was set down for preliminary conference on 10 February 1987 - the representative writing to state, inter alia:

"It should be noted that for nearly four years now I have been informed by the Department of the Treasurer both by the

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Minister Assisting the Treasurer and various private secretaries that the Commissioner has been requested to review the matter but still no result. On 3 January 1985 the Minister Assisting the Treasurer informed me that the Commissioner would be in touch as soon as the review was completed but nothing has been heard after over two years. Surely this delay is unreasonable."

11. It is agreed that the delay is unreasonable but the Tribunal is required to have regard to the law as it stood as at the time of assessment (in the absence of any retrospective legislation). Also as has been said before, the Tribunal is not bound by any policy decisions of the Commissioner which cannot displace the necessity for the Tribunal to apply the statutory provisions as enacted by Parliament.

12. Before the Tribunal the applicant's representative adopted what was set out in the correspondence referred to above and stated, inter alia, that it would be easy for the Commissioner to have the law amended so as to require each unit holder to include in their assessable income a proportionate share of the investment income - in other words the strata plan proprietors be treated as a partnership.

13. For the Commissioner it was submitted:

"(a) the amount of $197 had been correctly treated as assessable income (not a matter really in dispute except as to whose hands it was assessable in);

(b) the Strata Plan Proprietors were a company as defined in section 6(1);

(c) the principle of mutuality only applied to the members' levies which had not been assessed;

(d) the company was not a non-profit company as defined and had to be taxed accordingly; and

(e) the most beneficial rate of tax had been applied by way of the Commissioner exercising his discretion in terms of section 103A(5) to treat it as a public company."

14. As the High Court decision in
The Bohemians Club v. The Acting F.C. of T. (1918) 24 C.L.R. 334 and the cases referred to therein indicate a club cannot be assessable upon subscriptions from members (like the levies here) because "income consists of moneys derived from sources outside of" (at p. 337) the club - it is however assessable upon amounts e.g. interest because it is moneys derived from outside sources. Where a club is building up a fund for a specific purpose the need to pay tax on the interest derived from the investment of moneys will, as the representative points out here, diminish the amount available for the required purpose thereby necessitating additional funds. However such diminution is not a ground for denying the assessable character of the interest received.

15. It is the Tribunal's clear view that the submissions of the Commissioner's representative are correct and accordingly the Commissioner's decision must be affirmed. There is little that can be usefully added in elaboration for the sections etc. involved have been set out in the correspondence reproduced in earlier paragraphs. However it might be of some assistance (particularly as an oral decision was given and reasons thereupon requested) to quote what is said in ¶11-737 of the CCH Australian Federal Tax Reporter published by CCH Australia Limited "The Information Professionals". This paragraph deals with "Contributions to the body corporate constituted under strata titles legislation" and, inter alia, states:

"The body corporate constituted in accordance with the Strata Titles Acts of the various States is within the definition of `company' in sec. 6(1) of the Income Tax Assessment Act and is therefore taxable as such if and to the extent to which it derives a taxable income in any year of income...

Having regard to what has been said in ¶11-730 in relation to the applicability of the mutual principle to limited companies, it seems clear that the mutual principle applies to moneys contributed to the body corporate by the respective holders of strata titles so that such are not income and are not subject to tax in the hands of the body corporate. The body corporate prepares a budget in order to determine the contributions to be levied upon strata title holders. Where the body corporate has both an administrative fund and a sinking fund, the object of the budget for the administrative fund is to determine the likely expenditure during a twelve months' period for -

• (1) Maintenance and repair of the common property which is owned by the

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  body corporate as agent for the proprietors, i.e., the strata title holders.
• (2) The maintenance and repair of any personal property owned by the body corporate, e.g., washing machines, lawnmowers and other relevant personal property which it is empowered to acquire.
• (3) Insurance premiums.
• (4) Administrative and service items.

A budget is also prepared for the sinking fund but, whereas the administrative fund budget does not aim at a surplus, the sinking fund budget is aimed at building up a surplus for -

• (1) Painting or repainting of common property.
• (2) The acquisition of personal property.
• (3) The renewal or replacement of fixtures and fittings contained in the common property.

Clearly, the body corporate does not carry on a trading operation and the contributions received from members are not trading receipts...

However, income by way of interest on investments, rental of common property, telephone or washing machine collections from non-proprietors, etc., is not mutual income and is assessable. Expenditure incurred by the body corporate in gaining or producing the assessable income is of course deductible."

16. The Tribunal is conscious of the representative's feelings in the matter and his inability to appreciate why he should in effect be assessed when he is otherwise not taxable. However it is hoped that a perusal of these reasons and a realisation that other bodies (apart from bodies corporate) are in the same situation, will assist him to accept that the law is clear and that applying that law to the facts of the present case leaves only one conclusion open.

17. For the above reasons the decision of the Commissioner upon the applicant's objection to its assessment for the year ended 30 June 1983 (substituted accounting period year ended 30 September 1983) is affirmed.