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Edited version of your private ruling
Authorisation Number: 1012034349514
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Ruling
Subject: rental expenses
Questions
Are you entitled to a deduction for the full amount of expenses you incur in respect of your rental property which is rented under the National Rental Affordability Scheme (NRAS)?
Answer: No
Are you required to apportion the expense you incur in respect of your rental property which is rented under NRAS?
Answer: Yes
This ruling applies for the following period
Income year ending 30 June 2011
The scheme commenced on
1 July 2010
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.
You acquired a rental property which will be an approved rental dwelling under NRAS and participate in NRAS via a non-entity joint venture with Affordable Management Corporation (an NRAS approved participant).
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.
Entitlement to these incentives is subject to certain conditions being met by you, including that your rental property is rented to eligible tenants at an amount of at least 20% below market rates.
The NRAS incentives offered to you are annual incentives, comprising of:
· a Commonwealth Government incentive made by way of a refundable tax (Division 380 of the Income Tax Assessment Act 1997 (ITAA 1997)
· a cash payment from the relevant state government, which is NANE income (section 380-35 of the ITAA 1997).
You will incur expenses in respect of the rental property, including property manager fees, body corporate fees and annual fees paid to the approved participant in order to obtain your NRAS tax offset certificate.
Relevant legislative provisions
Section 8-1 of the Income Tax Assessment Act 1997
Division 380 of the Income Tax Assessment Act 1997
Section 380-35 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.
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income.
However sub-section 8-1(2) of the ITAA 1997 states you cannot deduct a loss where the outgoings are of a capital, private or domestic nature, or incurred in producing NANE income.
It is generally accepted that expenses incurred in respect of a rental property are considered to be incurred in the course of gaining or producing assessable income and are therefore deductible.
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).
In your situation, while derivation of assessable income by way of rent is one objective achieved by your participation in NRAS, the receipt of government incentives, including state government NANE income is another. The costs associated with making your property available as an NRAS rental property would need to be apportioned to reflect the derivation of associated assessable income and NANE income.
Accordingly the rental expenses you will incur in respect of the rental property must be apportioned, limiting your claim for any deduction to the portion of costs relating to the derivation of assessable income.
Additional information
Generally this apportionment of expenses would be made using the following formula to calculate the percentage of deductible expenses:
A x B
B+C
A = Otherwise deductible expenses
B = assessable rental income derived from the property
C = NANE income associated with the property (state government incentive)