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Ruling

Subject: Tax consequences for a beneficiary of a trust participating in an NRAS consortium

Question 1

Is the trustee of the pooled superannuation trust (the PST) entitled to a tax offset under section 380-15?

Answer

Yes

Question 2

Does the non-assessable non-exempt income (NANE income) of the PST include the amount of the individual interest of the PST in the NANE income of the Unit Trust under subparagraph 97(1)(c)(i) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 3

Will distributions by the Unit Trust to the PST that are attributable to the State Government contribution paid to the Unit Trust be disregarded for the purposes of determining the 'non-assessable part' of a distribution under section 104-70?

Answer

Yes

Question 4

Will Part IVA of the ITAA 1936 apply to deny any tax benefit that is otherwise available to the PST 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 (SISA), 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 subsection 97(1)

Income Tax Assessment Act 1936 paragraph 97(1)(a)

Income Tax Assessment Act 1936 subparagraph 97(1)(c)(i)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 paragraph 104-71(1)(a)

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 section 380-15

Income Tax Assessment Act 1997 subsection 380-15(1)

Income Tax Assessment Act 1997 paragraph 380-15(1)(a)

Income Tax Assessment Act 1997 paragraph 380-15(1)(b)

Income Tax Assessment Act 1997 paragraph 380-15(1)(c)

Income Tax Assessment Act 1997 paragraph 380-15(1)(d)

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

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

Income Tax Assessment Act 1997 subparagraph 380-25(3)(b)(i)

Income Tax Assessment Act 1997 paragraph 380-25(3)(c)

Income Tax Assessment Act 1997 section 380-30

Income Tax Assessment Act 1997 subsection 380-30(3)

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 PST.

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 380-15(1) sets out the circumstances in which an entity to whom NRAS rent flows indirectly is entitled to a tax offset for an income year. It provides as follows:

380-15(1)

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

(a)  the *Housing Secretary issues an *NRAS certificate in relation to an *NRAS year to a partnership or a trustee of a trust; and

(b)  *NRAS rent *derived:

(i)  from any of the *NRAS dwellings covered by the NRAS certificate; and

(ii)  during the NRAS year;

*flows indirectly to the entity in any income year; and

(c)  the offset year of the partnership or trustee begins in the NRAS year; and

(d)  the entity is:

…

(v)  a *superannuation fund, an *approved deposit fund or a *pooled superannuation trust.

For the purposes of paragraph 380-15(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 dwellings¹ from which that member derives NRAS rent² 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:

(a)  the *Housing Secretary issues an *NRAS certificate in relation to an *NRAS year to the *NRAS approved participant of an *NRAS consortium; and

(b)  the NRAS certificate covers one or more *NRAS dwellings; and

(c)  a *member of the NRAS consortium, other than the NRAS approved participant, *derives *NRAS rent during the NRAS year from any of those NRAS dwellings; and

(d)  the member is a partnership or a trustee of a trust.

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 Unit 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), thus satisfying the requirement of paragraph 380-15(1)(a).

For the purposes of paragraph 380-15(1)(b) and relevant to the PST as a beneficiary of the Unit Trust, subsection 380-25(3) sets out the circumstances in which NRAS rent flows indirectly to a beneficiary of a trust. Subsection 380-25(3) provides as follows:

380-25(3)

*NRAS rent flows indirectly to a beneficiary of a trust in an income year if, and only if:

(a)  during that income year, the NRAS rent is *derived by the trustee of the trust …; and

(b)  the beneficiary has this amount for that income year (the share amount):

(i)  a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936 ; or

…

(whether or not the share amount becomes assessable income in the hands of the beneficiary); and

(c)  the beneficiary's *share of the NRAS rent under section 380-30 is a positive amount (whether or not the beneficiary actually receives any of that share).

For the purposes of this ruling and with respect to subparagraph 380-25(3)(b)(i), it is assumed that 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 year, and therefore a share of the Unit Trust's net income for each year covered by paragraph 97(1)(a) of the ITAA 1936.

For the purposes of paragraph 380-25(3)(c) and pursuant to section 380-30 (specifically Item 3 of the table in subsection 380-30(3)) and the assumption that the Unit Trust will have a positive net income for each relevant income year, the PST's share of the NRAS rent derived by PIML as trustee of the Unit Trust will be so much of the NRAS rent derived by the Unit Trust that is taken into account in working out the PST's share amount, and would therefore be a positive amount.

Having satisfied the requirements of subsection 380-25(3), the NRAS rent derived by the trustee of the Unit Trust under a Consortium from an approved rental dwelling covered by an NRAS certificate will flow indirectly to the PST during the NRAS year, thus satisfying the requirement of paragraph 380-15(1)(b).

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 380-15(1)(c).

As a pooled superannuation trust within the meaning of section 48 of the SISA, the PST satisfies the requirement of paragraph 380-15(1)(d).

On the basis of all of the above, each of the requirements set out in subsection 380-15(1) are satisfied and the PST is entitled to a tax offset for each offset year equal to an amount calculated under subsection 380-15(2).

Question 2

Where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate, subparagraph 97(1)(c)(i) of the ITAA 1936 provides that the NANE income of the beneficiary shall include so much of the individual interest of the beneficiary in the NANE income of the trust estate as is attributable to a period when the beneficiary was a resident.

As a beneficiary presently entitled to a share of the income of the Unit Trust's trust estate, as assumed for the purposes of this ruling, the PST shall include so much of its interest in the NANE income of the Unit Trust's trust estate, including any State Government contribution received by the Unit Trust in relation to its participation in the NRAS, as NANE income of the PST.

Question 3

A payment by a trustee of a trust in respect of a beneficiary's unit (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it), will give rise to a CGT event E4 under section 104-70 where some or all of the payment (the non-assessable part) is not included in the beneficiary's assessable income. In working out the non-assessable part, any part of the payment that is NANE income is to be disregarded pursuant to paragraph 104-71(1)(a).

As any distribution by the Unit Trust to the PST that is attributable to the State Government contribution shall be included as NANE income of the PST (see question 2 above), that distribution will be disregarded for the purposes of determining the non-assessable part under section 104-70 (paragraph 104-71(1)(a)). As a consequence, CGT event E4 will not happen in respect of the PST and the distribution by the Unit Trust of an amount attributable to the State Government contribution will not reduce the cost base or reduced cost base of the PST's units in the Unit Trust.

This treatment is consistent with the policy set out in the Explanatory Memorandum to the National Rental Affordability Scheme (Consequential Amendments) Bill 2008 to ensure that there are no capital gains tax consequences from the receipt of incentives or other benefits under the NRAS which would reduce or remove the benefit that the incentives are intended to provide.

Question 4

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 PST.