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Does the tax cut for small business apply to strata schemes?

The Government has just reduced the tax rate for small businesses with a turnover of less than $2 million per year from 30% to 28.5%.

A number of strata committee members has asked us whether they should be using this lower tax rate when we prepare their sinking fund forecast.

They assume that their strata scheme is a “small business” because:

  • it has an Australian Business Number (or is eligible to apply for one),
  • it pays tax at the company tax rate, and
  • its taxable income is less than $2 million dollars.

Based on the general press releases that accompanied the new legislation this is an understandable belief. Unfortunately, as with most things tax, the devil is in the detail.

The relevant new section of the Income Tax Assessment Act 1997 is subsection 23(2). It says that the 28.5% rate applies “if the company is a small business entity”.

The term “small business entity” is defined in Subdivision 328-C of the ITAA 1997 as:

“(1)  You are a small business entity for an income year (the current year ) if:

(a)  you carry on a *business in the current year; and

(b)  one or both of the following applies:

(i)  you carried on a business in the income year (the previous year ) before the current year and your *aggregated turnover for the previous year was less than $2 million;

(ii)  your aggregated turnover for the current year is likely to be less than $2 million.”

The critical part of the definition for strata schemes is the requirement to “carry on a business”.

In Queensland and Victoria the strata legislation prohibits bodies corporate/owners corporations from carrying on a business. Although not illegal in other states, it is highly unlikely that most strata schemes will be undertaking activities of a type that qualifies as “a business”.

The test for “carrying on a business” is discussed in detail in TR 97/11. Merely earning taxable income by providing strata services such as records searches or letting part of the scheme property is not sufficient. A more aggressive, commercially oriented engagement will be required.  (This differs from the test for “carrying on an enterprise” which applies to ABN numbers.)

We have discussed this issue with ATO staff familiar with strata tax law who confirmed this interpretation. If you believe your scheme meets the “carrying on a business” criteria, they recommend you seek a private ruling to confirm this fact before using the 28.5% rate.

Kaylene Arkcoll BScQS MAppLaw AAIQS AAIM

By - Leary & Partners
Modified: 13 Jan 2016

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