Deductions for NRAS rental expenses
An investor in an NRAS property will be able to claim a deduction for the same type of expenses they have incurred as an investor who has invested in a non-NRAS property. However, any amount that an investor in an NRAS property 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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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 per cent 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.
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 5 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.
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 (i.e. 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.
Certainty about the tax implications of your arrangement
If you would like to know whether you are entitled to an NRAS tax offset from your involvement in a non-entity joint venture, you can ask us for a private ruling or class ruling.