Edited version of private ruling

Authorisation Number: 1011655487849

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Ruling

Subject: NRAS

Question

Are you entitled to the National Rental Affordability Scheme (NRAS) tax offset?

Answer:

No.

This ruling applies for the following period

Income year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You will enter an agreement with an approved participant under NRAS which has been marketed as being a non-entity joint venture (NEJV).

You own a property which you wish to make available under NRAS.

The agreement consists of a head lease in respect of your property between you and the approved participant.

You will receive rent from the approved participant, net of fees and charges.

The approved participant then enters a sub lease with an eligible tenant and receives rent from the tenant.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 380-5

Income Tax Assessment Act 1997 Section 380-10

Reasons for decision

To be able to claim the NRAS tax offset, a party to an NEJV needs to:

· be entitled to claim the NRAS tax offset by meeting the criteria outlined in subsection 380-10(1) of the ITAA 1997, which includes having NRAS rent covered by subsection 380-10(3) of the ITAA 1997 (the entitlement provisions)

· have an amount of NRAS tax offset to claim as outlined in subsection 380-10(2) of the ITAA 1997, which is the sum of all amounts worked out under subsection 380-10(4) of the ITAA 1997 (the calculation provisions).

The Commissioner is of the view that in the context in which the expression 'has' is used in paragraph 380-10(1)(a) of the ITAA 1997, it means 'has derived'. This is because the other relevant provisions, namely subsections 380-10(3) and 380-10(4) of the ITAA 1997, operate on the basis of NRAS rent being 'derived' by an entity. Also, paragraph 1.14 of the Explanatory Memorandum to the Bill (National Rental Affordability Scheme (Consequential Amendments) Bill 2008) introducing the relevant provisions strongly supports this view. Note that if this view is incorrect and 'has' is to be given a broader meaning than 'derive', then the use of 'derive' in the calculation provision of subsection 380-10(4) of the ITAA 1997 will nevertheless ensure that the amount of NRAS tax offset for anyone who does not derive NRAS rent will be nil.

What is NRAS rent?

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

To analyse what is NRAS rent, the definition can be broken into the following elements:

· rent derived

· from a rental dwelling

· under NRAS

Based on the established principles of derivation, the Commissioner is satisfied that in the arrangement outlined above, both the dwelling owner and the manager of the NEJV derive rent. The dwelling owner derives rent under the head lease and the manager of the NEJV derives rent under the sublease. That is, both the dwelling owner and the manager of the NEJV derive rent which is sufficient to satisfy the first element of the definition of NRAS rent.

To satisfy the second element, NRAS rent must be derived 'from a rental dwelling'. In both the head lease and sublease the source of the rent derived is the rental dwelling because it is the consideration for the lease over that dwelling. Therefore it seems clear that the NRAS rent is derived 'from a rental dwelling'.

The third element of the definition is the most important one for present purposes, namely that the rent is derived 'under the NRAS'. To determine whether rent is derived 'under' NRAS it is necessary to consider what the NRAS is.

What is NRAS?

NRAS is defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning as in the National Rental Affordability Scheme Act 2008 (NRAS Act). Therefore in determining if the NRAS rent is derived 'under' NRAS, it is necessary to have regard to the meaning of NRAS under the NRAS Act.

NRAS is defined in section 4 of the NRAS Act as the scheme prescribed for the purposes of section 5. Section 5 of the NRAS Act states:

Making the National Rental Affordability Scheme

To further the objects of this Act, the regulations must prescribe a Scheme (the National Rental Affordability Scheme) about the following matters:

the approval of participants (approved participants) by the Secretary

a) the approval of rental dwellings by the Secretary

b) providing incentives to an approved participant if certain conditions are satisfied

c) a matter required or permitted by this Act to be included in the Scheme

d) ancillary or incidental matters.

As section 5 refers to the 'objects of this Act', the object section of the NRAS Act is of further assistance for the purpose of interpreting 'under NRAS'. Section 3 of the NRAS Act states:

Object

The object of this Act is to encourage large-scale investment in housing by offering an incentive to participants in the National Rental Affordability Scheme so as to:

a) increase the supply of affordable rental dwellings

b) reduce rental costs for low and moderate income households.

The meaning of 'under NRAS' needs to be considered with reference to the definition of NRAS as constructed by sections 3, 4 and 5 of the NRAS Act. Taking into account these provisions, the Commissioner is of the view that the key elements of 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.

The facts of the outlined arrangement need to be considered to determine whether the rent derived 'under' NRAS is:

· the rent derived by the manager of the NEJV under the sublease

· the rent derived by the dwelling owner under the head lease

· both the rent derived by the manager of the NEJV and the rent derived by the dwelling owner.

Is the rent derived by the manager of the NEJV under the NRAS ?

First, consider the involvement of the manager of the NEJV. The manager of the NEJV is the approved participant. The manager of the NEJV applies to be part of NRAS. The manager of the NEJV receives the NRAS allocation in respect of the approved rental dwellings. The manager of the NEJV is responsible for lodging the statement of compliance under NRAS. The manager of the NEJV is the legal entity which FaCHSIA deals with under NRAS, and importantly, the manager of the NEJV under the sublease directly enters into a legal relationship with the tenants and provides the approved rental dwelling to a low-moderate income household to reduce their rental costs. Furthermore, the manager of the NEJV is the entity that is provided with a certificate (for all intents and purposes, the incentive referred to in paragraph 5(c) of the NRAS Act) in the name of the NEJV in accordance with regulation 29 of the National Rental Affordability Scheme Regulations 2008.

Note: [Regulation 25 of the National Rental Affordability Scheme Regulations 2008 provides that approved participants who satisfy the conditions of an allocation (in this case, the manager of the NEJV) are entitled to receive an incentive. While the definition of an incentive in section 4 of the NRAS Act is an NRAS tax offset or cash payment, it is not possible for a NEJV to receive the incentive as a tax offset from the Secretary of Housing. Instead, the manager of the NEJV is provided with a certificate in the name of the NEJV in accordance with regulation 29, to allow parties to the NEJV to claim the NRAS tax offset. It is reasonable to read the reference in section 5 of the NRAS Act to providing incentives to approved participants as a reference to providing a certificate. Therefore this element of the NRAS is satisfied in relation to the manager of the NEJV].

Considering the extent to which the manager of the NEJV participates in the key elements of the NRAS, the Commissioner is of the view that the rent derived by the manager of the NEJV under the sublease is clearly rent derived under the NRAS. That is, the rent derived by the manager of the NEJV under the sublease is correctly characterised as 'rent derived from a rental dwelling under the NRAS'.

Is the rent derived by you under NRAS ?

In your situation, you are not the approved participant under the NRAS. FaHCSIA do not associate the dwelling owner with an approved rental dwelling under the NRAS. That is, FaHCSIA do not have knowledge of the dwelling owner or their connection with a particular approved rental dwelling under the NRAS and do not have any dealings with them. Importantly, nor does a dwelling owner directly provide the approved rental dwelling to a low-moderate income household to reduce their rental costs or enter into a legal relationship with those tenants. Rather the dwelling owner enters into a legal relationship with the manager of the NEJV only, and provides the rental dwelling to the manager of the NEJV only.

The question is whether the dwelling owner also derives rent 'under' the NRAS. The Commissioner is of the view that, because none of the dealings by the dwelling owner is specifically recognised by the NRAS Act and, in particular, the lack of a direct connection between the dwelling owner and the NRAS eligible tenant, the rent paid under the head lease is not derived under the NRAS.