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Edited version of private ruling

Authorisation Number: 1011476906081

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Ruling

Subject: National rental affordability scheme - non-entity joint venture

Question 1

Will each arrangement the approved participant enters into with its Joint Venture Agreements constitute a 'non-entity joint venture' for the purposes of the National Rental Affordability Scheme (NRAS)?

Answer

Yes.

Question 2

Will the individual property owner's participation in the described arrangement and subsequent receipt of a certificate from the Housing Secretary qualify him to receive the NRAS tax offset under section 380-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 2011

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

The approved participant, as an approved participant under NRAS, has been granted an allocation of houses by the Housing Secretary.

The approved participant will enter a series of arrangements with individual investors in respect of participating in NRAS. Each arrangement will be made under a joint venture agreement in accordance with the Agreement provided, incorporating alterations proposed in the response to our request for further information.

Each individual property owner will make their property available for rent under NRAS.

The individual property owner will be responsible for the maintenance of the property, selection of eligible tenants and the collection of the NRAS rent. The approved participant will, however, provide a selection of property managers from which the individual property owner must engage one to perform these functions on the owner's behalf.

The approved participant will submit the relevant compliance reporting to the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA). The Agreement requires the individual property owner to furnish the approved participant with relevant information in respect of the compliance reporting.

The Agreement provides that the arrangement may cease upon agreement between the parties, for example, where an individual property owner wishes to sell the property.

The approved participant may also cease the arrangement with an individual property owner in the event of the owner breaching the NRAS compliance rules, for example, by not renting the property to an eligible tenant.

The approved participant may enter a new arrangement by substituting the property with another property and owner. When an existing property is sold, the approved participant may also enter a new arrangement where the purchaser wishes to participate in NRAS.

The Agreement states the approved participant is entitled to receive a return from the arrangement equalling a percentage of the Australian Government NRAS incentive (a tax offset under section 380-10 of the ITAA 1997).

It is intended by the relevant parties (the approved participant and each individual investor) that the arrangement described above would constitute a non-entity joint venture for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

The individual property owner will enter an arrangement with the approved participant, as described above, in the capacity as an individual property owner / investor.

Reasons for decision

NRAS - Background

NRAS is an initiative of the Australian Government intended to assist low to middle income earners secure affordable accommodation. The initiative provides incentives to participants who provide housing at below market rates to eligible tenants.

The NRAS incentives include a tax offset under Division 380 of ITAA 1997.

Section 380-10 of the ITAA 1997 provides that, in certain circumstances, a party to a non-entity joint venture (NEJV) is entitled to a tax offset when the NEJV is issued with a certificate from the Housing Secretary under the National Rental Affordability Scheme Act 2008. To receive the offset, a party must also be in receipt of NRAS rental income.

Non-entity joint venture

The term 'non-entity joint venture' is defined in section 995-1 of the ITAA 1997.

For there to be a NEJV, there needs to be four elements to the arrangement:

Establishing the presence or otherwise of the first two elements in an arrangement is generally not an issue. However, the remaining characteristics - joint control and sharing of output - can be more problematic to establish.

Joint control and sharing of output generally

Arguably the features of joint control and sharing of output allow a NEJV arrangement to be distinguished from other types of arrangements, for example, a commercial service agreement with one party merely providing a service to another for a basic fee.

The extent to which each participant can influence the strategy and operations of the venture (that is, have joint control) can vary. Joint control is usually outlined in the contractual agreement, specifying the nature and extent of the joint control, for example, unanimous consent of the participants or control over a particular aspect of the joint venture.

Although a party may be involved in decision making, they may not necessarily be a participant in a joint venture. For example, a property agent may vet and recommend tenants to a home owner but it will generally be the home owner's decision who will ultimately be the tenant. Rather than exercising joint control over the decision, the agent is merely providing a service for the home owner.

Sharing of output refers to the manner in which parties to a NEJV benefit individually from the arrangement. It can be distinguished from a sharing of net profits or the payment/receipt of a basic fee for services rendered by one party to another. Its presence can be most clearly seen when the output of the NEJV is a physical product such as minerals from a mining venture, where both parties to an NEJV have a right to particular aspects of a mixed mineral output or a share of overall output.

However, as the NRAS legislative framework contemplates the option of an NEJV in the context of the scheme, the notion of sharing of output must also go beyond the sharing of a physical output such as minerals in the above mining example.

Your circumstances

The arrangement at issue has features that would not be seen in a simple commercial property manager agreement - the approved participant is an NRAS approved participant which, by way of the Agreement, allows it and individual property owners to access the NRAS incentives; the approved participant and the individual property owner have their own rights as defined in the Agreement; and both parties will each benefit from the arrangement.

This arrangement clearly satisfies the first two elements of an NEJV as discussed above. That is, there is a written contract between 2 parties under which both undertake the economic activity as part of NRAS - the rental of property in a requisite manner to secure government NRAS incentives.

With regards joint control, it is accepted the right to control various aspects of the arrangement are afforded to each party under the Agreement. The Agreement goes beyond a mere service contract, where one party simply provides a service to another party who has sole control over the arrangement.

The output of the NRAS initiative generally is the delivery of affordable housing to eligible tenants. This in turn identifies the relevant outputs of this arrangement being NRAS rent and government incentives. As the approved participant's return from the arrangement is calculated in terms of a percentage of the Australian Government's incentive, it is accepted that there exists a sharing of output.

Having regard to the full circumstances of the arrangement at issue, it is accepted that there is a contractual arrangement relating to a specific economic activity, there exists joint control and a sharing of output. That is, it is accepted that the arrangement between the approved participant and each property owner constitutes a NEJV for the purposes of NRAS.

NRAS tax offset - Individual property owner

Section 380-10 of the ITAA 1997 provides that an entity will have an entitlement to a NRAS tax offset where they meet all of the following criteria:

In this instance, the individual property owner is an individual, a party to a NEJV and derives NRAS rent.

The Commissioner of Taxation cannot provide an assurance that the Housing Secretary will issue valid certificates to an NEJV in a form that accords with the requirements of section 380-10: you may wish to discuss this further with FaHCSIA. However, where the Housing Secretary does issue such certificates and the above conditions are met, the ATO is required to allow these relevant parties to claim the tax offset when they lodge their own income tax returns.

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