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Ruling

Subject: NRAS Structure

Issue 1 - Income Tax Assessment Act 1997

Question 1

Is the Trust deemed to be issued with an NRAS certificate pursuant to subsection 380-14(2)?

Answer

Yes

Question 2

Will Investors be entitled to tax offsets pursuant to section 380-25 of the ITAA 1997 on the basis that NRAS rent flows indirectly to unitholders in the Trust?

Answer

Yes

This ruling applies for the following period<s>:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 May 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. The National Rental Affordability Scheme was established to encourage investment in affordable housing stock by offering a National Rental Incentive (Incentive) to providers of new rental dwellings.¹ The objectives of the NRAS include encouraging large-scale investment in and innovative delivery of affordable housing

2. The Incentive comprises a Federal Government contribution in the form of a refundable tax offset for each dwelling provided and a State or Territory Government contribution in the form of a cash payment per dwelling. The entitlement to the Federal tax offset is the subject of Division 380 of the Income Tax Assessment Act 1997 (ITAA 1997). The State/Territory payment is non-assessable non-exempt income of the entity deriving the payment: section 380-35 of the ITAA 1997.

3. A pre-condition of entitlement to Incentive is the issue of a certificate by the Federal Housing Secretary to an NRAS Approved Participant, which is the entity primarily responsible for ensuring compliance with the provision of dwellings under the NRAS and the other NRAS statutory requirements (such as reporting and record-keeping). Division 380 provides that the entitlement to the tax offset may pass to other entities, including investors in consortiums established for the purpose of participating in the NRAS or who otherwise derive the rental amounts from NRAS dwellings indirectly through trusts or partnerships.

4. The transaction will be undertaken:

a. the Investor will acquire Units in a Trust, funded by a limited recourse loan made available by the Lender to certain employees

b. The Investor must pay to the Lender interest on the loan (in advance)

c. the Trust will enter into an agreement with a not for profit entity (NFP), an NRAS Approved Participant (Approved Participant although this may also be the NFP) and the Lender.

d. Under the Agreement the NFP (as owner and lessor of the dwellings will assign its right to receive rental income to the Trust,

e. Before the end of the income year, it is expected that the Federal Housing Secretary will issue the necessary NRAS certificate or certificates to the Approved Participant. This will establish the amount of the Federal tax offset applicable to the dwellings.

f. Investors on the register of the Trust at the end of the income year will be presently entitled to all of the net income of the Trust,. A distribution of the income of the Trust will be made at the end of the income year.

Assumptions

The ruling is made on the basis of the following assumptions:

(a) the Investors are not traders in investments and are not treated for taxation purposes as trading in interests in the Trust, carrying on a business of investing in the Trust, or holding their interests in the Trust as trading stock or as a revenue asset;

(b) all dealings between the Investors and all the Lender will be at arm's length;

(c) the Investment Loan will not extend beyond its original maturity date;

(d) The Investors will not repay the Investment Loan prior to their maturity or terminate the scheme early;

(e) that Investors will be presently entitled to, and will have a vested and indefeasible interest in, the income of the Trust; and

(f) the assignments made under the agreement between the Trust, Approved participant and Lender are effective at law.

Relevant legislative provisions

Paragraph 97(1)(a) of the Income Tax Assessment Act 1936

Subsection 380-14(1) of the Income Tax Assessment Act 1997

Subsection 380-14(2) of the Income Tax Assessment Act 1997

Subsection 380-15(1) of the Income Tax Assessment Act 1997

Subsection 380-25(3) of the Income Tax Assessment Act 1997

Subsection 380-30(2) of the Income Tax Assessment Act 1997

Subsection 380-30(3) of the Income Tax Assessment Act 1997

Subsection 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1 Question 1

Is the Trust deemed to be issued with an NRAS certificate pursuant to subsection 380-14(2)?

Summary

Yes.

Detailed reasoning

1. Subsection 380-14(1) of the Income Tax Assessment Act 1997 operates to deem a member of an NRAS consortium that is a partnership or a trustee of a trust, other than the NRAS approved participant, to have been issued with an NRAS certificate where the following conditions are satisfied:

(a) the *Housing Secretary issues an *NRAS certificate in relation to an *NRAS year to the *NRAS approved participant of an *NRAS consortium; and

(b) the NRAS certificate covers one or more *NRAS dwellings; and

(c) a *member of the NRAS consortium, other than the NRAS approved participant, *derives *NRAS rent during the NRAS year from any of those NRAS dwellings; and

(d) the member is a partnership or a trustee of a trust.

2. With respect to the present scheme, paragraphs 380-14(1)(a), 380-14(1)(b) will be satisfied where the approved participant is issued with a certificate covering one or more NRAS dwellings. Paragraph 380-14(1)(d) should also be satisfied on the basis that the responsible entity, as trustee of the Trust, is the relevant member of the NRAS consortium.

3. In order to satisfy paragraph 380-14(1)(c) it must first be established that the Trust derives NRAS rent.

What is NRAS rent?

4. NRAS rent is defined in subsection 995-1(1) of the ITAA 1997 as, 'rent derived from a rental dwelling under the National Rental Affordability Scheme for an income year'.

5. This definition was considered in ATO ID 2009/146 where it was broken down into the following elements:

· rent derived

· from a rental dwelling

· under the NRAS

6. It is clear that amounts paid under the lease between the NFP and each eligible NRAS tenant constitutes rent derived from a rental dwelling.

7. The meaning of 'under the NRAS' needs to be considered with reference to the definition of the NRAS as constructed by sections 3, 4 and 5 of the National Rental Affordability Scheme Act 2008. Taking into account these provisions, the Commissioner is of the view that the key elements of the NRAS include approved participants, approved rental dwellings, the process by which the Secretary of Housing approves them and the provision of incentives to approved participants. These key elements need to be considered in the context of the object of the scheme to increase the supply of affordable housing and reduce rental costs of low-moderate income earners.²

8. Under the agreement, the NFP and approved participant (where the approved participant is a separate entity) are involved in all the key elements of the NRAS. On the basis that the rental agreement between the NFP and the tenant satisfies the requirements of the NRAS, the rent paid by the tenants in respect of the rental dwellings should be characterised as rent derived from a NRAS dwelling under the NRAS.

Does the Trust derive NRAS rent?

9. The NFP will assign the right to receive rent under the lease agreement to the Trust pursuant to the agreement between the entities.

10. On the basis that the assignment of the rent to the Trust constitutes an effective assignment, income received by the assignee would have the same character as it would in the hands of the assignor.

11. The decision of the High Court in FCT v Everett 80 ATC 4076 (Everett) established that the effective assignment by a partner of his interest in the partnership is effective in ensuring that net partnership income attributable to that interest is derived beneficially by the assignee. Upon the effective assignment of the partner's interest, a trust would effectively be created such that the assignor would "stand in the relationship of a trustee to the assignee". Barwick CJ noted that the continuity of the trust relationship is on the basis that "the assignment does not constitute the assignee a partner or pass to him the powers of management, administration and inspection of books and accounts which repose in the assignor as a partner."³

12. Similarly in FCT v Galland 84 ATC 4053 (Galland) the Full Federal Court affirmed that the assignment by the taxpayer of his share of his interest in a partnership to his family trust was effective under general law and for income tax purposes. In paragraph 9 of Taxation Ruling IT 2051, the Commissioner accepts that valid assignments on all fours with the Everett or Galland decisions will be accepted for tax purposes.

13. Under the NRAS product it is assumed for the purposes of this ruling that there is an effective assignment by the NFP such that the Trust has a right to receive the rent under the lease agreement in the future. Using the analysis provided in Everett, the Trust can not involve itself in the affairs of the NFP in its capacity as landlord and therefore the rental income would be held by the NFP on trust for the Trust as they arise. The rent received by the NFP on trust for the Trust should retain their character when paid to the Trust under the agreement. As the payments arise in respect of NRAS rent, the Trust will derive 'NRAS rent' in an NRAS year for the purposes of subsection 380-14(1).

14. On the basis that the requirements of subsection 380-14(1) are satisfied, subsection 380-14(2) would apply to deem the Trust to have been issued with a NRAS certificate in the relevant NRAS year.

Issue 1 Question 2

Will Investors be entitled to tax offsets pursuant to section 380-25 of the ITAA 1997 on the basis that NRAS rent flows indirectly to unitholders in the Trust?

Summary

Yes.

Detailed reasoning

Flow through of NRAS rent to unitholders

1. In respect to NRAS certificates issued to trustees, a unitholder who derives NRAS rent indirectly in an income year will be entitled to a tax offset in that income year under section 380-25 where the requirements of subsection 380-15(1) are satisfied.

Paragraph 380-15(1)(a) - The Housing Secretary issues an NRAS certificate in relation to an NRAS year to a trustee of a trust;

2. For the purposes of this ruling it is assumed the responsible entity, as trustee of the Trust, will be deemed to have been issued with a NRAS certificate under section 380-14.

Paragraph 380-15(1)(b) NRAS rent derived from any of the NRAS dwellngs covered by the NRAS certificate during the NRAS year flows indirectly to the unitholders in any income year;

3. NRAS rent will flow indirectly to unitholders where the following requirements in subsection 380-25(3) are met:

Paragraph 380-25(3)(a) - during that income year, the NRAS rent is *derived by the trustee of the trust, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and

4. This paragraph should be satisfied as the responsible entity, as trustee of the Trust, derives NRAS rent for the reasons explained in question 1.

Paragraph 380-25(3)(b) - the beneficiary has this amount for that income year (the share amount):

(i) a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936); or

(ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act;

(whether or not the share amount becomes assessable income in the hands of the beneficiary); and

5. This paragraph should be satisfied as it is expected Investors will be presently entitled to a share of the net income of the Trust for an income year and that share will be covered by paragraph 97(1)(a) of the ITAA 1936.

Paragraph 380-25(3)(c) the beneficiary's *share of the NRAS rent under section 380-30 is a positive amount (whether or not the beneficiary actually receives any of that share).

6. Subsection 380-30(2) provides that an entity's share of the NRAS rent is an amount notionally allocated to the entity as its share of the NRAS rent, whether or not the entity actually receives any of that NRAS rent.

7. That amount is equal to the entity's share of the NRAS rent as described in the table in subsection 380-30(3).

8. Item 3 of the table is relevant to the arrangement to the extent NRAS rent is derived by the responsible entity, as trustee of the Trust and unitholders have a 'share amount' under subsection 380-25(3).

9. The investor's share of the NRAS rent is defined in column 3 to be "so much of the amount worked out under column 2 of this item [i.e. the NRAS rent, where the Trust has a positive amount of net income for that year] as is taken into account in working out that share amount".

Paragraph 380-15(1)(c) - the offset year of the partnership or trustee begins in the NRAS year; and

10. The offset year commences on 1 July 2012 and falls within the NRAS year ending on 30 April 2013. Therefore paragraph 380-15(1)(c) should be satisfied.

Paragraph 380-15(1)(d) - the entity is:

(i) an individual; or

(ii) a *corporate tax entity when the NRAS rent flows indirectly to it; or

(iii) the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for the offset year; or

(iv) the trustee of an *FHSA; or

(v) a *superannuation fund, an *approved deposit fund or a *pooled superannuation trust.

11. Investors are likely to be individuals or superannuation funds who satisfy paragraph 380-15(1)(d).

Amount of the tax offset

12. The amount of the tax offset is the sum of the amounts worked out using the formula in subsection 380-15(2) for each NRAS dwelling from which there is NRAS rent:

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