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Ruling

Subject: NRAS Structure

Question 1

Can the taxable value of the expense payment fringe benefit that arises from the payment or reimbursement of the interest on the Investment Loan incurred by employees of the employer be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 2

Can the taxable value of the expense payment fringe benefit that arises from the payment or reimbursement of the Loan Establishment Fee incurred by employees of the employer be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 3

Will section 67 of the Fringe Benefits Tax Assessment Act 1986 apply to the employer in relation to the reimbursement of interest expenses and fees of the arrangement?

Answer

No

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). However, 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 (Investment Loan) made available by the Lender to certain employees

b. the Investor must pay to the Lender interest on the loan (in advance) and a Loan Establishment Fee

c. 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

d. on or around 30 June, the Investor will redeem their Units and apply the funds from the redemption of the Units to repay their Loan.

5. The employees are Australian residents for taxation purposes.

6. The employer of the employees will make a payment in discharge, in whole or in part, of the obligation of the employees to pay interest and fees to the Lender under the Investment Loan pursuant to a valid salary sacrifice arrangement.

7. Prior to 30 June the employees incur the following year's interest expense. The employees request the employer to discharge the employees' payment obligation to the loan provider as part of their remuneration packages.

8. Employees are required to provide evidence to substantiate the interest liability and establishment fee liability. They must complete an FBT declaration confirming that a once-only deduction would have arisen for them in respect of the interest if it had not been the subject of the fringe benefit and that they will not claim a tax deduction for the interest expense or establishment fee expense in their tax returns.

9. The employer will reimburse some employees in respect of 100% of the amount of expenditure incurred by them on interest and establishment fee under their respective investment loans.

10. The loans will be discharged by the employees at 30 June 2012.

11. As a consequence of their investment in the Trust the Investors will also become entitled to the Federal tax offsets.

12. Based on figures and worked examples supplied, the aggregate of the interest expense and Loan Establishment Fee will exceed the aggregate of the distribution on the Units and the Federal tax offset.

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 members of the group of employing entities will be at arm's length;

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

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

(e) the Investors enters into a valid salary sacrifice arrangement.

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

Relevant legislative provisions

Subsection 24(1) of the Fringe Benefits Tax Assessment Act 1986

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Section 67 of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Can the taxable value of the expense payment fringe benefit that arises from the payment or reimbursement of the interest on the Investment Loan incurred by employees of the employer be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Summary

The taxable value of the expense payment fringe benefit that arises from the payment or reimbursement of the interest on the Investment Loan incurred by employees of the employer can be reduced under section 24 of Fringe Benefits Tax Assessment Act 1936 (FBTAA).

Detailed reasoning

1. The Lender will be providing an expense payment fringe benefit to its employee's when it either pays for, or reimburses, interest expense incurred under the Investment loan.

2. The taxable value of an expense payment fringe benefit is calculated in accordance with either section 22 of the FBTAA, which applies to in-house expense payment benefits, or section 23 of the FBTAA, which applies external expense payment fringe benefits.

3. Subsection 24(1) of the FBTAA permits a reduction of the taxable value of an expense payment fringe benefit, either in-house or external, under the 'otherwise deductible rule' (ODR) where all the necessary conditions of that section are met.

4. Where the ODR applies, the calculation of the taxable value of the fringe benefit is reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense.

5. However, the ODR only applies where the employee would have been entitled to a 'once-only deduction' for the expenditure paid or reimbursed by the employer. A 'once-only deduction' is defined, in subsection 136(1) of the FBTAA:

once-only deduction , in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income.

Therefore a once only deduction is a deduction that is wholly or partly allowable under the income tax law in one year only.

6. The conditions that must be satisfied in full for the application of the reduction, contained subsection 24(1) of the FBTAA to the taxable values of the relevant expense payment fringe benefits, are:

a. The recipient of the expense payment fringe benefit is an employee of the employer.

b. If the employee had paid the expense incurred, the employee would be entitled to a 'once-only deduction' (other than a foreign income deduction) in respect of that expenditure under the Income Tax Acts.

c. The amount of the 'notional deduction' is greater than nil.

d. The employer possesses documentary evidence, or a copy, in respect of the recipient's expenditure by the date required under the FBTAA.

e. The employer had received declarations, in a form approved by the Commissioner, from the employee in respect of the recipients expenditure by the date required under the FBTAA.

7. These conditions have been satisfied in relation to the reimbursement of the interest expenses:

a. Recipient of the expense payment fringe benefit is an employee of employer:

This condition is satisfied as the employer is the employer.

b. Employee would be entitled to a 'once-only deduction' for the expenditure:

Employees would be entitled to a 'once-only deduction' for the interest incurred on the loan, under section 8-1 of the ITAA 1997, if the employer did not reimburse or pay that expense.

c. The amount of the 'notional deduction' is more than nil:

The 'notional deduction' is determined using the formula:

GD - RD

GD is the amount of the 'once-only deduction' the employee would be entitled to.

RD is the amount, if any, of expenditure incurred by the employee that is not reimbursed or paid for by the employer that the employee is entitled to claim as a deduction.

Since the employer will be reimbursing or paying all of the interest expense employees incur, RD will be nil. Therefore the notional deduction will be greater than nil.

d. Employer possesses the required documentary evidence by the required time:

This condition is satisfied as the employees are required to provide evidence to substantiate the interest liability prior to 30 June.

e. Employer receives the required declarations by the required time:

This condition is satisfied as the employee will give to the employer the declarations required to be made under the FBTAA by the required time.

8. As it has been found that all the conditions have been met for the operation of subsection 24(1) of the FBTAA, the taxable values of the expense payment fringe benefits can be reduced by the ODR pursuant to that subsection.

Question 2

Can the taxable value of the expense payment fringe benefit that arises from the payment or reimbursement of the Loan Establishment Fee incurred by employees of the employer be reduced under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Summary

The taxable value of the expense payment fringe benefit that arises from the payment or reimbursement of the Loan Establishment Fee incurred by employees of the employer can be reduced under section 24 of the FBTAA.

Detailed reasoning

1. The conditions that must be satisfied in full for the application of the reduction, contained subsection 24(1) of the FBTAA to the taxable values of the relevant expense payment fringe benefits, are:

a. Recipient of the expense payment fringe benefit is an employee of employer:

This condition is satisfied as the employer is the employer.

b. Employee would be entitled to a 'once-only deduction' for the expenditure:

Employees would be entitled to a 'once-only deduction', under section 25-25 of the ITAA 1997 (as the period of the loan is less than one year and is repaid in the year the loan is taken out) for the loan establishment fee if the employer did not reimburse or pay that expense.

c. The amount of the 'notional deduction' is more than nil:

The 'notional deduction' is determined using the formula:

GD - RD

GD is the amount of the 'once-only deduction' the employee would be entitled to.

RD is the amount, if any, of expenditure incurred by the employee that is not reimbursed or paid for by the employer that the employee is entitled to claim as a deduction.

Since the employer will be reimbursing or paying the whole of the loan establishment fee employees incur, RD will be nil. Therefore the notional deduction will be greater than nil.

d. Employer possesses the required documentary evidence by the required time:

This condition is satisfied as the employees are required to provide evidence to substantiate the establishment fee liability prior to 30 June.

e. Employer receives the required declarations by the required time:

This condition is satisfied as the employee will give to the employer the declarations required to be made under the FBTAA by the required time.

2. As it has been found that all the conditions have been met for the operation of subsection 24(1) of the FBTAA, the taxable values of the expense payment fringe benefits can be reduced by the ODR under the provisions of that subsection.

Question 3

Will section 67 of the Fringe Benefits Tax Assessment Act 1986 apply to the employer in relation to the reimbursement of interest expenses and fees of the arrangement?

Summary

Section 67 of the FBTAA will not apply to the employer in relation to the reimbursement of interest expenses and fees of the arrangement.

Detailed reasoning

1. Section 67 of the FBTAA is the general anti-avoidance provision of the FBTAA. In explaining the circumstances in which it is intended to apply the Explanatory Memorandum to the Fringe Benefits Tax Assessment Bill 1986 stated:

The clause is intended to apply where, on an objective view of a particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of having an amount omitted from an employers fringe benefits taxable amount of any year of tax in respect of a benefit provided to a person.

2. The circumstances in which the Commissioner can apply section 67 are set out in paragraphs 67(1)(a) and (b) of the FBTAA which contain the following requirements:

· an employer obtains (or would have done so but for section 67 of the FBTAA) a tax benefit in respect of a year of tax

· the tax benefit was obtained in connection with an arrangement under which a benefit is or was provided to a person

· the arrangement was entered into, or commenced to be carried out on or after 19 September 1985 and

· one of the persons who entered into, or carried out the arrangement did so for the sole or dominant purpose of enabling the employer to obtain a tax benefit.

3. Subsection 67(2) of the FBTAA provides that a tax benefit may arise where an amount that is not included in the employer's aggregate fringe benefits amount if that amount would have been, or could reasonably be expected to have been included if the arrangement had not been entered into or carried out.

4. If the employer did not reimburse the interest expenses and establishment fee incurred by its employees, the employees would have paid the interest expense themselves (or not been reimbursed for incurring that expense). In such situations the employee would be entitled to claim an income tax deduction for that expense.

5. As the employer would not have provided a fringe benefit if the arrangement had not been carried out, the employer would have no FBT liability. Therefore there is no tax benefit to the employer as the employer's aggregate fringe benefits amount would not be any less than it would have been but for the arrangement.

¹ See the National Rental Affordability Scheme Act 2008, the National Rental Affordability Scheme Regulations 2008, the National Rental Affordability Scheme Prospectus dated 2008 and the National Rental Affordability Scheme Policy Guidelines dated June 2011.