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  • NRAS rental income and deductions

    If you are an investor in an NRAS property, you must declare the income you receive and will be able to claim a deduction for the same type of expenses you have incurred as an investor who has invested in a non-NRAS property.

    However, any amount that you can claim as a deduction must be apportioned to the extent that these expenses relate to the earning of non-assessable and non-exempt (NANE) income. Deductions for the decline in value of any depreciating assets, as well as the cost of capital works, are also subject to apportionment.

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    General deductions

    Generally, a deduction can be claimed for rental property expenses that are incurred in gaining or producing assessable income. The expense must not be a private, domestic or capital expense or incurred in relation to gaining or producing exempt income or NANE income.

    While a taxpayer who invests in an NRAS property receives assessable rental income they also receive government incentives, including state government NANE income. In order to receive government incentives, including state government NANE income, investors must rent out their property at 20% less than the market rent.

    If expenditure related to the NRAS rental properties had been incurred solely for the purpose of gaining assessable income, it would be wholly deductible. However, as investors in an NRAS property incur expenses in order to both earn assessable income and NANE income, any expenses an investor incurs in order to invest in NRAS must be apportioned.

    Borrowing expenses

    You can deduct expenditure you incur (such as loan fees) in order to borrow money, to the extent that you use the money for the purpose of producing assessable income. The deduction is spread over the lesser of five years or the length of the loan.

    Where the borrowed money is used partly for a non-assessable income producing purpose it is necessary to apportion any deduction claimed for borrowing expenses. This includes expenses incurred in order to borrow money to purchase a NRAS property as the borrowed money is used to earn NANE income as well as assessable income. The allowable deduction for borrowing expenses must therefore be apportioned.

    Capital allowances

    A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, with certain exceptions.

    You can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. You must reduce the deduction by any part of the asset's decline in value that is attributable to your use of the asset, or you having it installed ready for use, for a purpose other than a taxable purpose. 'Taxable purpose' includes 'the purpose of producing assessable income'.

    Depreciating assets held by an NRAS investor are in part used to produce NANE income. As these assets have been used for a purpose other than a taxable purpose (that is, to earn NANE income) any deduction claimed in respect to the depreciation of these assets must be apportioned.

    Deductions for capital works

    To deduct an amount for capital works an investor’s construction expenditure must be used for the purpose of producing assessable income or conducting research and development (R&D) activities.

    Taxation Ruling TR 97/25 notes that where capital works expenditure is wholly attributable to a construction expenditure area that is used partly in a deductible way then apportionment of the allowable deduction for capital works will be necessary. Therefore, the deduction for capital works must be reduced to the extent the investment in the NRAS properties produces NANE income.

    Examples to help you in reporting

    The contract you have with the approved participant and related parties regarding your NRAS property affect how you complete your tax return.

    These are examples only and you will need the details from your approved participant to know the exact amounts each year.

    Two basic contracts exist:

    • Arrangement A – you (the property owner) have leased your property to the approved participant or a related party for a commercial rent.
    • Arrangement B – the approved participant or related party are merely acting as agents for you as a property manager.
    Arrangement A

    In Arrangement A:

    • you lease your property to an NRAS approved participant
    • you do not claim the tax offset
    • the amounts you receive under the lease are assessable. The amounts may be described as rent, NRAS rent, NRAS tax offset, State incentive, National Rental Incentive (NRI) etc
    • you apportion expenses according to your equitable interest (the share you own in the property – this may be 50-50 with someone).

    Example

    Jack and Jill have an NRAS rental property owned 50/50 as tenants in common that is leased to an approved NRAS participant at $21,000 per year ($13,000 NRAS rent + $6,000 NRAS tax offset + $2,000 state incentive).  $20,000 of the rent was received during the year and expenses are $30,000.

    They will each declare $10,000 as rental income and be entitled to a deduction of 50% × $30,000 = $15,000

    End of example
    Arrangement B

    In Arrangement B:

    • you use an NRAS approved participant as a property manager
    • you can claim the NRAS tax offset according to your equitable interest
    • the rent you receive from the property manager is assessable income
    • you are entitled to claim the NRAS tax offset as advised by the approved participant for the NRAS year, however this does not need to be included in your assessable income
    • the NRI or state government incentive is non-assessable non-exempt (NANE) income. NANE is an amount which is excluded from your assessable income and ignored for the purposes of calculating your available losses
    • you apportion your deductions using the following formula
      • Deduction × (Assessable rent÷(Assessable rent + NANE income)) = NRAS deduction.
       

    Example

    Bill and Ben have an NRAS rental property owned 50-50 as tenants in common that derives $16,000 NRAS rent (i.e. the market rent is $20,000).

    The expenses are $30,000.

    Gross NRAS incentives (NRAS refundable tax offset and NANE) are $10,000, which means the state incentive is $2,500. The state incentive was paid to the approved participant by 30 June.

    Bill and Ben will each declare rental income of $8,000 in their tax returns.

    They will each be entitled to a deduction of 50% × $30,000 × (16,000÷(16,000 + 2,500)) = $12,973.

    Each would be entitled to a $3,750 NRAS tax offset and $1,250 NRI state incentive.

    NRAS tax offset = $7,500 as advised by the approved participant as attaching to the property

    Each would be entitled to claim a RTO of 50% = $3,750

    NANE = $2,500

    This is not reported anywhere on the tax return

    End of example

    See also:

    • TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements

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      Last modified: 15 Oct 2019QC 21519