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Edited version of your private ruling

Authorisation Number: 1012408374114

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Ruling

Subject: Tax consequences for a member of an NRAS consortium

Question 1

Does the NRAS rent flow indirectly through the Unit Trust under subsection 380-25(5)?

Answer

Yes

Question 2

Does section 380-14 apply to assume the Unit Trust to have been issued with an NRAS certificate?

Answer

Yes

Question 3

If assumption 2 is not correct for a particular income year such that the Unit Trust does not have a positive net income for each relevant income year, will the trustee of the Unit Trust be entitled to a tax offset under section 380-20?

Answer

Yes

Question 4

Will any State Government contribution payment be non-assessable non-exempt income (NANE income) of the Unit Trust under section 380-35?

Answer

Yes

Question 5

Will the rent derived by the Unit Trust from the NRAS tenant be assessable income of the Unit Trust under section 6-5?

Answer

Yes

Question 6

Will the interest and borrower's fee derived by the Unit Trust from the approved participant under the loan be assessable income of the Unit Trust under section 6-5?

Answer

Yes

Question 7

Will the Unit Trust be entitled to a deduction under section 8-1 for the rent and property management fee payable to the approved participant?

Answer

Yes

Question 8

Will the expenditure for the rent and property management fee be required to be apportioned for the purposes of determining the amount deductible under section 8-1?

Answer

Yes

Question 9

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to deny any tax benefit that is otherwise available to the Unit Trust under the scheme?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2013

Income year ending 30 June 2014

Income year ending 30 June 2015

Income year ending 30 June 2016

Income year ending 30 June 2017

Income year ending 30 June 2018

Income year ending 30 June 2019

Income year ending 30 June 2020

Income year ending 30 June 2021

Income year ending 30 June 2022

Income year ending 30 June 2023

Income year ending 30 June 2024

Income year ending 30 June 2025

Income year ending 30 June 2026

The scheme commences on:

On or after 1 January 2013

Relevant facts and circumstances

All legislative references in this ruling are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Investment in the PST by investors and investment in the Unit Trust by the PST

The Unit Trust is a registered managed investment scheme in respect of which an opportunity to invest will be offered to wholesale investors under an Information Memorandum (the Fund Information Memorandum).

The purpose of the Unit Trust, as described in the draft Fund Information Memorandum, is to contribute to the capital funding of the National Rental Affordability Scheme (NRAS) by providing finance to institutional counterparties such as community housing providers, not for profit organisations, universities and corporations that own or propose to acquire the underlying NRAS dwellings.

The trustee of the PST, a pooled superannuation trust as defined under section 48 of the Superannuation Industry (Supervision) Act 1993, will issue a separate Information Memorandum (the PST Information Memorandum).

Pursuant to the draft PST Information Memorandum, the trustee intends to raise capital from investors that are permitted to invest in a pooled superannuation trust (for example, complying superannuation funds and life companies) through the issue of units in the PST to fund the subscription by PSL for Class A units in the Unit Trust.

The offers under both the PST Information Memorandum and the Fund Information Memorandum will provide for one or more periods during which the PST and Unit Trust respectively seek commitments from investors to subscribe to invest in them.

Arrangements between the Unit Trust and approved participants

The responsible entity of the Unit Trust and each approved participant will execute a Consortium Deed to form an NRAS consortium for the purposes of Division 380 (the Consortium) for a period of ten years. The approved participant is an 'approved participant' for the purposes of the National Rental Affordability Scheme Regulations 2008 (NRAS Regulations).

The purpose of the Consortium is to facilitate the leasing and management of approved rental dwellings, as defined in the NRAS Regulations, such that the provisions of Division 380 in relation to NRAS consortiums may apply in respect of the entitlement to the National Rental Affordability Scheme Tax Offset or an amount payable for an NRAS year (the tax offset), in applicable circumstances; and the responsible entity is entitled to receive direct financial support and/or in-kind contributions made by a State or Territory to an approved participant in connection with the NRAS (the State Government contribution).

In other words, the approved participant would, but for this scheme, be entitled to receive the tax offset pursuant to the NRAS Regulations and Division 380, the State Government contribution and rent in relation to the approved rental dwellings. However, the effect of the Consortium Deed and the other arrangements entered into by the responsible entity and the approved participant under the Consortium is that the Unit Trust or its investors will be entitled to the tax offset, the State Government contribution and rent, instead of the approved participant.

Distribution entitlements and cash flows for the Unit Trust and PST

Each issued unit in the PST and Unit Trust confers a proportional beneficial interest in the PST and Unit Trust respectively (i.e. the amount an investor receives will be proportionate to the number of units they hold relative to the number of units on issue at the end of the distribution period).

If this scheme operates as described, the Unit Trust will make annual income distributions.

The approved participant authorises the responsible entity to receive the State Government contribution and directs the responsible entity to retain the full amount of the State Government contribution for its own purposes. Where the approved participant receives any State Government contribution in respect of an approved rental dwelling, the approved participant must promptly pay an amount equal to the State Government contribution to the responsible entity.

In addition to the distribution of its share of income of the Unit Trust (including any State Government contribution), the PST is expected to receive, where available, the tax offset.

Discretionary withdrawals of capital from the PST or Unit Trust are generally not available.

Assumptions

1. The PST will be presently entitled to a share of the income of the Unit Trust's estate in accordance with subsection 97(1) of the ITAA 1936 in any income year.

2. The Unit Trust will have a positive net income for each relevant income year.

3. The income year for the Unit Trust and the responsible entity will begin on 1 July and end on 30 June each year, commencing at the date of the Unit Trust's establishment.

4. The State Government Contribution will be paid to the Unit Trust.

5. The State Government Contribution paid to the Unit Trust will be cash payments (and not in-kind payments).

6. An NRAS certificate will be issued to each approved participant by the Housing Secretary in relation to an NRAS year and will not be withdrawn, revoked or otherwise cease to apply to the approved rental dwelling(s). The NRAS certificate issued to each approved participant will cover one or more approved rental dwellings.

7. There will not be a change in the essential nature and character of the trust relationship between the trustee of the PST and the beneficiaries of the PST, or between the trustee of the Unit Trust and the beneficiaries of the Unit Trust, which would cause a resettlement of either trust to arise during the periods covered by this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 subsection 97(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 section 380-14

Income Tax Assessment Act 1997 subsection 380-14(1)

Income Tax Assessment Act 1997 paragraph 380-14(1)(a)

Income Tax Assessment Act 1997 paragraph 380-14(1)(b)

Income Tax Assessment Act 1997 paragraph 380-14(1)(c)

Income Tax Assessment Act 1997 paragraph 380-14(1)(d)

Income Tax Assessment Act 1997 subsection 380-14(2)

Income Tax Assessment Act 1997 subsection 380-15(2)

Income Tax Assessment Act 1997 section 380-20

Income Tax Assessment Act 1997 subsection 380-20(1)

Income Tax Assessment Act 1997 paragraph 380-20(1)(a)

Income Tax Assessment Act 1997 paragraph 380-20(1)(b)

Income Tax Assessment Act 1997 paragraph 380-20(1)(c)

Income Tax Assessment Act 1997 paragraph 380-20(1)(d)

Income Tax Assessment Act 1997 paragraph 380-20(1)(e)

Income Tax Assessment Act 1997 subsection 380-20(2)

Income Tax Assessment Act 1997 subsection 380-20(3)

Income Tax Assessment Act 1997 subsection 380-25(3)

Income Tax Assessment Act 1997 subsection 380-25(4)

Income Tax Assessment Act 1997 paragraph 380-25(4)(b)

Income Tax Assessment Act 1997 subsection 380-25(5)

Income Tax Assessment Act 1997 paragraph 380-25(5)(a)

Income Tax Assessment Act 1997 paragraph 380-25(5)(b)

Income Tax Assessment Act 1997 section 380-30

Income Tax Assessment Act 1997 section 380-35

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 section 48

National Rental Affordability Scheme Act 2008

National Rental Affordability Scheme Regulations 2008

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the trustee of the Unit Trust.

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

Question 1

Subsection 380-25(5) sets out the circumstances in which NRAS rent flows indirectly through an entity. It provides as follows:

380-25(5)

*NRAS rent flows indirectly through an entity (the first entity) to another entity if, and only if:

With respect to paragraph 380-25(5)(a), the PST (i.e. the other entity for the purposes of subsection 380-25(5)) is the focal entity under item 3 of the table in section 380-30 in relation to the NRAS rent on the basis that:

With respect to paragraph 380-25(5)(b), the PST's share of the NRAS rent derived by the trustee of the Unit Trust will be based on the Unit Trust's (i.e. the first entity for the purposes of subsection 380-25(5)) share of the NRAS rent as an intermediary entity under item 3 of the table in section 380-30.

Having satisfied the requirements of subsection 380-25(5), the NRAS rent derived by the trustee for the Unit Trust under a Consortium from an approved rental dwelling covered by an NRAS certificate will flow indirectly through the Unit Trust.

Question 2

Subsection 380-14(2) assumes that a member of an NRAS consortium2 has been issued with an NRAS certificate in relation to an NRAS year and in respect of one or more NRAS dwellings3 from which that member derives NRAS rent during the NRAS year, where the requirements of subsection 380-14(1) are satisfied.

The requirements of subsection 380-14(1) are as follows:

380-14(1)

This section applies if:

For the purposes of this ruling and with respect to paragraphs 380-14(1)(a) and (b), it is assumed that each approved participant that executes a Consortium Deed with the trustee of the Units Trust to form an NRAS consortium will be issued with an NRAS certificate by the Housing Secretary in relation to an NRAS year covering one or more approved rental dwellings (i.e. NRAS dwellings).

For the purposes of paragraphs 380-14(1)(c) and (d) and as a member of the Consortium other than the approved participant, the trustee of the Unit Trust will, pursuant to the arrangements entered into with the approved participant under the Consortium, derive NRAS rent from an approved rental dwelling covered by the NRAS certificate during the NRAS year.

Having satisfied the requirements of subsection 380-14(1), the trustee of the Unit Trust will be assumed to have been issued with an NRAS certificate in relation to an NRAS year pursuant to subsection 380-14(2).

Question 3

Subsection 380-20(1) sets out the circumstances in which a trustee of a trust that does not have net income for an income year is entitled to a tax offset for an income year. It provides as follows:

380-20(1)

An entity is entitled to a *tax offset for an income year (the offset year) if:

For the purposes of paragraph 380-20(1)(a), subsection 380-14(2) assumes that a member of an NRAS consortium has been issued with an NRAS certificate in relation to an NRAS year and in respect of one or more NRAS dwellings from which that member derives NRAS rent during the NRAS year, where the requirements of subsection 380-14(1) are satisfied.

For the reasons set out in response to question 2 of this ruling, the trustee of the Unit Trust will satisfy the requirements of subsection 380-14(1), and will therefore be assumed to have been issued with an NRAS certificate in relation to an NRAS year in its capacity as trustee of the Unit Trust pursuant to subsection 380-14(2), thus satisfying the requirement of paragraph 380-20(1)(a).

The trustee of the Unit Trust which, for the purposes of this question only, is assumed to not have a positive net income for a particular income year, satisfies the requirements of both paragraphs 380-20(1)(b) and (c).

If:

For the purposes of this ruling, it is assumed that the income year for the trustee of the Unit Trust will begin on 1 July and end on 30 June each year, commencing at the date of the Unit Trust's establishment. Each offset year of the trustee of the Unit Trust, being the income year in which entitlement to a tax offset arises, will therefore begin in a corresponding NRAS year, defined in the NRAS Act to be the year beginning on 1 May, thus satisfying the requirement of paragraph 380-20(1)(e).

On the basis of all of the above, each of the requirements set out in subsection 380-20(1) are satisfied and the trustee of the Unit Trust is entitled to a tax offset in the relevant offset year equal to an amount calculated pursuant to subsections 380-15(2), 380-20(2) and 380-20(3).

Question 4

Pursuant to section 380-35, a payment of the State Government contribution to the Unit Trust (as a member of an NRAS consortium) by a Department of a State or Territory in relation to the Unit Trust's participation in the NRAS will be NANE income of the Unit Trust.

Question 5

Net income is defined by section 95 of the ITAA 1936 to mean the total assessable income of the trust estate calculated under the ITAA as if the trustee were a taxpayer in respect of that income and was a resident, less all allowable deductions.

Section 6-5 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer.

Typically, the receipt of rent is ordinary income. Accordingly, the rent derived by the Unit Trust from an NRAS tenant under the Consortium is ordinary income, assessable under section 6-5 and included in the calculation of the Unit Trust's net income under section 95 of the ITAA 1936.

Question 6

As per the rent derived by the Unit Trust, the interest and borrower's fee derived by the Unit Trust from the approved participant under the lending arrangements of the Consortium are ordinary income, assessable under section 6-5 and included in the calculation of the Unit Trust's net income under section 95 of the ITAA 1936.

Question 7

Section 8-1 allows a deduction from assessable income for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income.

The rent and property management fee payable by the Unit Trust to the approved participant under the arrangements of the Consortium are expenses incurred by the Unit Trust in gaining or producing its assessable income in the form of rent from an NRAS tenant under the Consortium, as well as interest and the borrower's fee from the approved participant under the Consortium.

The Unit Trust will therefore be entitled to a deduction for the rent and property management fee incurred under section 8-1 and will include it in the calculation of its net income under section 95 of the ITAA 1936.

Question 8

Subsection 8-1(2) denies a deduction under section 8-1 for a loss or outgoing to the extent that it is of capital or of a capital nature, of a private or domestic nature, or incurred in producing exempt income or NANE income.

While derivation of assessable income by way of rent or otherwise is one objective achieved by participation in the NRAS, the receipt of Government incentives, including State Government NANE income in the form of the State Government contribution, is another.

Apportionment of expenditure is necessary where it serves both an assessable income producing end and some other end (Ronpibon Tin NL v FC of T (1949) 8 ATD 431).

Accordingly, the rent and property management fee incurred by the Unit Trust under the Consortium must be apportioned, limiting a claim for any deduction under section 8-1 to the portion of costs relating to the derivation of assessable income.

Question 9

Provided that the scheme ruled on is entered into and carried out as disclosed in this ruling, it is accepted that the scheme is an ordinary commercial transaction and the anti-avoidance provisions in Part IVA of the ITAA 1936 will not apply to the Unit Trust.

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