An owners corporation — known as a body corporate in Queensland and South Australia, and a strata company in Western Australia — is the legal entity created when a property is subdivided into lots. It manages the common property on behalf of the lot owners and collects levies to fund that management. The bookkeeping obligations are shaped by state legislation (the Owners Corporations Act, Body Corporate Act, or equivalent), income tax rules specific to mutual associations, and the GST treatment of levy income.
The Mutual Income Principle and Income Tax
The most important tax concept for owners corporations is the mutuality principle. Under this principle, an entity cannot make a profit from transactions with its own members — the income and the contributions come from the same group of people, so there is no profit in the true economic sense.
Applied to owners corporations: levies collected from lot owners are generally not assessable income of the owners corporation, because the members (lot owners) are paying the money to their own collective entity and the entity has no separate commercial purpose distinct from its members. Similarly, expenditure funded from those levies is not deductible, because the income is not assessable.
However, the mutuality principle has limits:
- Income from non-members is assessable — rental income from leasing common areas to third parties, income from temporary use fees charged to guests or trades, interest earned on the sinking fund investment account
- Income from members for non-member services may be assessable — if the owners corporation provides services beyond the standard levy-funded common property management (for example, it undertakes maintenance on individual lots as a service to owners, for a fee)
- Penalties and late payment fees on levies are sometimes treated as assessable income, though the position is not definitively settled
The income tax position should be reviewed with a tax agent for any owners corporation that earns meaningful non-levy income.
GST and Owners Corporation Levies
The GST treatment of levies paid by lot owners depends on the nature of the lots. The ATO's guidance (GSTR 2012/4) addresses this:
- Residential lots: levies collected from residential lot owners are input-taxed to the extent they relate to residential premises. The owners corporation does not charge GST on these levies and cannot claim ITCs on related costs.
- Commercial lots: levies from commercial lot owners are a taxable supply if the owners corporation is registered for GST. GST is charged on the levy, and ITCs are claimable on related costs.
- Mixed strata developments: where a strata scheme includes both residential and commercial lots, the owners corporation operates a mixed-supply structure. Apportionment of costs between taxable (commercial) and input-taxed (residential) supplies is required.
Most purely residential owners corporations will not be required to register for GST (their levy income is input-taxed and may not reach the $75,000 threshold through non-member income). Mixed commercial/residential developments are more complex and typically require specialist GST advice.
The Administrative and Sinking Funds
State legislation requires owners corporations to maintain two separate funds:
Administrative fund: covers day-to-day operating costs — cleaning, landscaping, common area utilities, property management fees, insurance, and minor maintenance. Levied annually with quarterly instalments.
Sinking fund (capital works fund): accumulates reserves for long-term capital expenditure — major building maintenance, roof replacement, lift servicing, structural repairs. The amount to be accumulated is determined by a sinking fund plan prepared by a qualified assessor; the plan must be renewed every five to ten years depending on the jurisdiction.
The two funds must be kept in separate bank accounts. Commingling them is a breach of the legislation. The bookkeeper must ensure each bank account is correctly labelled, all fund transfers are authorised by the committee (with appropriate minutes), and the accounts clearly show the fund balance at all times.
Interest earned on the sinking fund is assessable income for income tax purposes (as non-member income). It is also subject to GST if the owners corporation is registered.
Levy Notices and the Debtors Ledger
Levies are raised by the committee according to the budget and the lot entitlements set out in the plan of subdivision. Each lot's levy is proportional to its lot entitlement (which reflects the relative size or value of the lot compared to the development total).
The levy notice is a formal document that becomes a debt legally owing by the lot owner to the owners corporation upon service. The debtor ledger should show:
- Each lot as a debtor record
- The levy notice amounts as debts raised on the due date
- Payments received against each lot's account
- Arrears by lot, with the date the arrears arose
Owners corporations have extensive recovery powers for unpaid levies under state legislation — including interest charges, recovery orders from the Civil and Administrative Tribunal, and in extreme cases a charge over the lot title. The bookkeeper should flag lots with arrears above a threshold to the committee promptly.
Insurance: Valuation and Premium Allocation
Owners corporations are required by law to insure the common property (and in most states, the building structure) for its full replacement value. The insurance premium is one of the largest single costs in the administrative fund.
The bookkeeper should maintain:
- A schedule of the current insurance policy (insurer, policy number, coverage amount, renewal date)
- The current replacement value as assessed by the insurer's valuation
- The premium as an annual commitment, prepaid monthly or quarterly
If the strata scheme has a mix of commercial and residential lots, the premium allocation between the funds or between lot types should be agreed with the committee.
Annual Financial Statements and Statutory Compliance
Each state's legislation requires owners corporations to prepare annual financial statements — at minimum a balance sheet and income and expenditure statement — and to provide them to lot owners. The complexity of the required financial statements varies: in Victoria, the Owners Corporations Act prescribes the financial report content in some detail; in Queensland, the Body Corporate legislation sets out similar requirements.
The statements must reconcile the administrative fund and the sinking fund separately, show the bank balances, and compare budget to actual expenditure. For larger developments (more than 100 lots or above a financial threshold), an audit or review by a registered auditor may be required.
The bookkeeper should be familiar with the specific legislative requirements in the state where the scheme is registered — the requirements differ sufficiently across states to make a generic template unreliable.