Edited version of your written advice

Authorisation Number: 1012948554241

Date of advice: 29 January 2016

Ruling

Subject: Income tax: National Rental Affordability Scheme

Question 1

Will the proposed arrangement between the Approved Participant and the Investor constitute a partnership as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will payments received by the Approved Participant from state government in relation to their participation in the National Rental Affordability Scheme (NRAS) be non-assessable non-exempt income under section 380-35 of the ITAA 1997?

Answer

Yes

Question 3

Will payments received by the Investor from the Approved Participant in relation to the Investors participation in the National Rental Affordability Scheme (NRAS) be non-assessable non-exempt income (NANE) under section 380-35 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

1 July 2022 to 30 June 2023

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

The scheme commences on:

1 July 2015

Relevant facts and circumstances

1. The NRAS is a Commonwealth Government scheme designed to encourage large-scale investment in affordable housing by offering tax and cash incentives to providers of new rental dwellings.

2. Under the NRAS:

• Rental properties (Eligible Properties) are made available to low or moderate income households (Eligible Tenants) at X% below the market rental rate.

• A person or entity (Approved Participant) is granted allocations (Allocations) to provide Eligible Properties to Eligible Tenants.

• Approved Participants are responsible for the management of and compliance with NRAS conditions relating to their Allocations.

• Provided the Approved Participant can provide Eligible Properties that satisfy the conditions of the NRAS they will receive:

• NRAS refundable tax offsets (Tax Offsets) from the Commonwealth Government, and

• cash payments from the relevant State Government (State Government Payments).

• Approved Participants may enter into arrangements with other parties (Property Owners) who wish to make their properties available to Eligible Tenants without the Property Owner becoming an Approved Participant.

• Approved Participants may pass on the economic benefit of Tax Offsets or State Government Payments to Property Owners.

3. X is an Approved Participant and the Investor is not an Approved Participant.

4. The Investor is considering entering into a contractual arrangement (Proposed Agreement) with X to make rental property (Rental Property) owned by the Investor available to Eligible Tenants under the NRAS.

5. A draft template of the Proposed Agreement has been provided by the Approved Participant and the Investor as part of their ruling request.

6. Under the terms of the draft template of the Proposed Agreement, the Investor would:

• agree to include their Rental Property, as set out in the schedule to the Proposed Agreement, in the NRAS scheme operated by the Approved Participant, and agree to the conditions imposed by the agreement,

• pay an establishment fee to the Approved Participant,

• receive the Tax Offsets that relate to the Rental Property,

• have the right to receive Y% of any State Government Payments that relate to the Rental Property,

• agree to only lease the Rental Property to Eligible Tenants,

• agree to enter into a property tenancy management agreement with an approved tenancy manager, and

• agree to other rights and responsibilities.

7. Under the terms of the draft template of the Proposed Agreement, the Approved Participant:

n would have the right to retain Y% of the State Government Payments that relate to the Investors Rental Property,

n have obligations with respect to NRAS compliance and reporting, and

n would agree to other rights and responsibilities.

8. Other relevant clauses contained in the draft template of the Proposed Agreement:

…..

The relationship between you and us is enshrined solely in this agreement and is limited to carrying out the activities in this agreement.

1.6 Nothing contained in this Agreement constitutes us being your partner, or you being our partner nor does it create any partnership for any purpose.

1.7 No action taken by us in satisfying our obligations under this agreement should be taken to mean that we have received a share of the income in relation to the ownership of your property or are in receipt of any income jointly with you.

….

9. Rental income (Rental Income) will be derived by the Investor from Eligible Tenants on the Rental Property, representing Z% of the market rental rate of the Rental Property. The investor will not be sharing any of this Rental Income with the Approved Participant and there will be no obligation or agreement for the Investor to do so.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 380-35

Income Tax Assessment Act 1997, section 995-1

Tax Laws Amendment (2001 Measures No.5) Act 2011

Reasons for decision

Issue 1

Question 1

Summary

To be a partnership for taxation purposes the Approved Participant and the Investor (the Parties to the Proposed Agreement) would need to be carrying on a business in partnership or in receipt of income jointly. Analysis of the terms of the Proposed Agreement between the Parties demonstrates that neither of these conditions would be met, consequently the relationship contained in the Proposed Agreement would not amount to a partnership for taxation purposes.

Detailed reasoning

Partnership is defined in section 995-1 of the ITAA 1997 to mean:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

Carrying on business as partners

Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) provides guidance in determining whether persons are carrying on business as partners for income tax purposes, paragraph 3 states:

There are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners. The question of whether a partnership exists is one of fact. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

Paragraph 4 of TR 94/8 goes on to list the relevant factors in deciding if persons are carrying on business as partners:

Intention

- the mutual assent and intention of the parties

Conduct

(a) joint ownership of business assets

(b) registration of business name

(c) joint business account and the power to operate it

(d) extent to which parties are involved in the conduct of the business

(e) extent of capital contributions

(f) entitlement to a share of net profits

(g) business records

(h) trading in joint names and recognition of the partnership.

Paragraph 5 of TR 94/8 goes on to qualify that:

The weight to be given to these factors varies with the individual circumstances. The above list of factors is not exhaustive and no single factor is decisive, although the entitlement of a share of net profits is essential.

Under the terms of the Proposed Agreement between the Parties:

• It is expressly stated that the relationship between the Parties is enshrined solely in the agreement.

• It is expressly stated that it is the intention of the Parties that they will not be partners for any purpose.

• There is no requirement for any joint ownership of any business assets, rather under the terms of the Proposed Agreement the only substantial business asset, the Rental Property, is owned solely by the Investor.

• There is no requirement for the registration of a business name.

• There is no requirement for a joint business account.

• While there are rights and responsibilities relating to the Investor and rights and responsibilities relating to the Approved Participant, these rights and responsibilities do not amount to conducting a joint business.

• There is no requirement for any joint capital contributions.

• There is no entitlement to any share of net profits.

• There is nothing requiring the maintenance of joint business records.

• There is nothing to indicate that the Parties will be trading in joint names.

Thus, consideration of the factors contained in TR 94/8 leads to the conclusion that, if executed as drafted, the Parties to the Proposed Agreement would not be carrying on a business as partners.

Joint receipt of ordinary income or statutory income

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners explains the basis upon which the net income or the loss from a co-owned rental property should be divided between its owners. Paragraph 3 of TR 93/32 explains that:

Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business.

Paragraph 6 of TR 93/32 goes on to say that:

…. the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

Thus, the principles outlined in TR 93/32 establish that under the extended income tax definition of partnership, it is sufficient for persons in joint receipt of income as a result of their ownership of joint property to be in partnership for income tax purposes.

Under the terms of the Proposed Agreement there is no jointly owned property from which the Parties to the agreement will receive joint income. The Investor will be the sole owner of their Rental Property which they will rent out to Eligible Tenants receiving all the rental income from that property. The amounts received by the Approved Participant under the Proposed Agreement (the establishment fee and Y% of the cash State Government Payments) reflect their role as an Approved Participant facilitating access by the Investor to NRAS incentives as a result of the provision affordable housing.

Because under the terms of the Proposed Agreement there is no receipt of joint income as a result joint ownership of property there will be no partnership under the extended taxation definition.

Limited Partnership

Limited partnership is defined in section 995-1 of the ITAA 1997 which requires:

• an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited, or

• an association of persons with, a separate legal personality, formed for the sole purpose of becoming a venture capital limited partnership, an early stage venture capital limited partnership, an Australian venture capital fund of funds or a venture capital management partnership.

In this situation the Proposed Agreement would not be a limited partnership because there is no association of persons:

• carrying on a business as partners or the receipt of joint income, or

• with a separate legal personality formed for any of the above purposes.

Conclusion partnership

The execution of the Proposed Agreement will not result in the Parties constituting a partnership for taxation purposes because under the terms of the Proposed Agreement:

• the Parties will not be carrying on a business as partners,

• the Parties will not be in receipt of joint income, and

• the proposed relationship of the Parties will not constitute a limited partnership.

Question 2

Summary

Because the Approved Participant receives payments from a relevant state or territory department in relation to their participation in the NRAS these payments will be non-assessable non-exempt income under section 380-35 of the ITAA 1997.

Detailed reasoning

Payments made by a Department of a State or Territory in relation to your participation in the NRAS are made non-assessable non-exempt income by virtue of section 380-35 of the ITAA 1997, which states:

A payment made to you, or a non-cash benefit provided to you, (whether directly or indirectly, such as through an NRAS consortium of which you are a member) by:

(a) a Department of a State or Territory; or

(b) a body (whether incorporated or not) established for a public purpose by or under a law of a State or Territory;

in relation to your participation in the National Rental Affordability Scheme is not assessable income and is not exempt income.

In this instance, the Approved Participant has NRAS Allocations to provide Eligible Properties to Eligible Tenants. It is accepted that any payments from a relevant Department of a State or Territory to the Approved Participant in relation to their participation in the NRAS will be non-assessable non-exempt income under section 380-35 of the ITAA 1997.

Question 3

Summary

Once the Proposed Agreement is executed the Investor will be a member of a NRAS consortium with the Approved Participant. As such if the Approved Participant passes on the economic benefit of NRAS related cash payments from a State Government or Territory Department to the Investor those payments will be non-assessable non-exempt income by virtue of section 380-35 of the ITAA 1997.

Detailed reasoning

Amendments were made by the Tax Laws Amendment (2001 Measures No.5) Act 2011 which expands the operation of section 380-35 of the ITAA 1997 to ensure indirect payments made by a Department of a State or Territory to a member of an NRAS consortium indirectly (via an approved participant) in relation to their participation in the NRAS are non-assessable non-exempt income.

The Explanatory Memorandum to the Tax Laws Amendment (2001 Measures No.5) Bill 2011 provides the following example (example 3.45 in paragraph 3.78) of the intended operation of section 380-35 of the ITAA 1997 to indirect NRAS payments received by NRAS Consortium members relating to state government payments:

Example 3.45: Treatment of a state government NRAS-related payment received indirectly by the taxpayer

Mr Smith is part of the XYZ Housing Group, an NRAS consortium providing 400 rental dwellings under the NRAS across South Australia. Mr Smith owns one of these dwellings.

The South Australian Government elects to make its contribution to the NRAS incentive through a cash payment. In the case of NRAS consortiums, the South Australian Government makes a single cash payment to the approved participant of the consortium, in respect of all of the dwellings operated by the consortium which are eligible for an NRAS incentive.

In 2010-11, all of XYZ Housing Group's dwellings are eligible for the full NRAS incentive. Accordingly, the South Australian Government makes a payment in May 2011 to the approved participant of XYZ Housing Group of $914,000 (that is, $2,285 * 400).

This amount is non-assessable non-exempt income in the hands of the approved participant of XYZ Housing Group.

The practice of XYZ Housing Group is to have the economic benefit of the NRAS incentive flow to the individual dwelling owners. Accordingly, in May 2011 the manager makes a payment of $2,285 to Mr Smith.

This amount is an NRAS-related payment made by a state government which is received indirectly by Mr Smith. Therefore, it is non-assessable, non-exempt income.

Thus if the approved participant of an NRAS consortium chooses to pass on a state government payment, relating to participation in the NRAS, to an NRAS consortium member who owns an NRAS dwelling, section 380-35 of the ITAA 1997 will operate to make that payment non-assessable non-exempt income in the hands of the property owner.

NRAS consortium is defined in section 995-1 of the ITAA 1997 to mean:

…. a consortium, joint venture or non-equity joint venture:

(a) established by one or more contractual arrangements, the purpose of which are to facilitate the leasing of NRAS dwellings; and

(b) that is not a corporate tax entity, a superannuation fund, a trust or a partnership.

In the event that the Proposed Agreement is executed it is accepted that the Investor will be a member of an NRAS consortium with the Approved Participant. It is accepted that any cash payment made by a State Government or Territory Department, under the NRAS to the Approved Participant, which is passed on to the Investor under the terms of the Proposed Agreement will be non-assessable non-exempt income of the Investor under section 380-35 of the ITAA 1997.

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