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Ruling

Subject: NRAS Structure - Head lease/Sub-lease

Issue 1 - Income Tax Assessment Act 1997

Question 1

Is the Trust deemed to be issued with an NRAS certificate pursuant to subsection 380-14(2)?

Answer

Yes

Question 2

Will Investors be entitled to tax offsets pursuant to section 380-25 of the ITAA 1997 on the basis that NRAS rent flows indirectly to unitholders in the Trust?

Answer

Yes

This ruling applies for the following periods:

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 July 2013

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 the 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). The NRAS Approved Participant is likely to be a charity or other not-for-profit entity. 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 as follows:

a. the Investor will acquire units in a Trust, funded by a limited recourse loan made from the Lender

b. the Investor must pay interest on the Loan (in advance) to the Lender.

c. the Trust will enter into a Consortium Agreement with an Approved Participant under the NRAS (Approved Participant).

d. under the Consortium Agreement, the Approved Participant will lease the dwellings to the Trust under a head lease. The Trust will lease the dwellings back to the Approved Participant under a sub-lease and the Approved Participant will lease the dwellings to the eligible NRAS tenants.

e. the Approved Participant will make the relevant election pursuant to section 380-11 of the ITAA 1997.

f. Before the end of the income year, it is expected that the Federal Housing Secretary will issue the necessary NRAS certificate or certificates to the Approved Participant. This will establish the amount of the Federal tax offset applicable to the dwellings.

g. 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.

Assumptions

The ruling is made on the basis of the following assumptions:

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

(b) the Trust will have a positive net income for each relevant income year;

(c) the income year for the Trust will begin on 1 July and end on 30 June each year;

(d) the State Government Contribution will be paid to the Approved Participant. The Approved Participant will retain the State Government Contribution.

(e) a NRAS certificate will be issued to each Approved Participant by the Housing Secretary in relation to a NRAS year and will not be withdrawn, revoked or otherwise cease to apply to the approved rental dwellings. The NRAS certificate issued to each NRAS will cover one or more approved rental dwellings.

Relevant legislative provisions

Section 380-11 of the Income Tax Assessment Act 1997

Subsection 380-14(1) of the Income Tax Assessment Act 1997

Subsection 380-14(2) of the Income Tax Assessment Act 1997

Subsection 380-15(1) of the Income Tax Assessment Act 1997

Subsection 380-25(3) of the Income Tax Assessment Act 1997

Subsection 380-30(2) of the Income Tax Assessment Act 1997

Subsection 380-30(3) of the Income Tax Assessment Act 1997

Section 380-35 of the Income Tax Assessment Act 1997

Subsection 995-1(1) 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.

Issue 1 Question 1

Is the Trust deemed to be issued with an NRAS certificate pursuant to subsection 380-14(2)?

Summary

Yes.

Detailed reasoning

1. Subsection 380-14(1) of the Income Tax Assessment Act 1997 operates to deem a member of an NRAS consortium that is a partnership or a trustee of a trust, other than the NRAS approved participant, to have been issued with an NRAS certificate where the following conditions are satisfied:

(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.

2. With respect to the present scheme, paragraphs 380-14(1)(a) and 380-14(1)(b) will be satisfied where the Approved Participant is issued with a certificate covering one or more NRAS dwellings. Paragraph 380-14(1)(d) should also be satisfied on the basis that the trustee of the Trust, is the relevant member of the NRAS consortium.

3. In order to satisfy paragraph 380-14(1)(c) it must first be established that the Trust derives NRAS rent.

What is NRAS rent?

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

5. This definition was considered in ATO ID 2009/146 where it was broken down into the following elements:

· rent derived

· from a rental dwelling

· under the NRAS

6. Amounts paid the lease arrangements constitute rent derived from a rental dwelling, however only one entity derives rent 'under the NRAS'. The meaning of 'under the NRAS' needs to be considered with reference to the definition of the NRAS as constructed by sections 3, 4 and 5 of the National Rental Affordability Scheme Act 2008. Taking into account these provisions, the Commissioner is of the view that the key elements of the 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.²

7. The Approved Participant is involved in all the key elements of the NRAS. The Approved Participant deals directly with the Housing Secretary and receives rent directly from the tenants occupying the rental dwellings. On the basis the lease between the Approved Participant and the tenant satisfies the requirements of the NRAS, the rent paid by the tenants in respect of the rental dwellings should be characterised as rent derived from a NRAS dwelling 'under the NRAS'.

NRAS rent and election by the Approved Participant

8. The Approved Participant has the ability to make an election under section 380-11 of the ITAA 1997 to effectively pass their entitlement to the NRAS tax offset to the Trust.

9. Section 380-13 of the ITAA 1997 provides a 'special rule' for trustees where an election is made by a NRAS approved participant to pass the entitlement to tax offsets to other members of the NRAS consortium. This section deems the trustee member's rent to be NRAS rent.

10. Section 380-13 of the ITAA 1997 operates to deem a consortium member's ordinary rent to be treated as NRAS rent for each dwelling:

(a) from which the electing member derived NRAS rent during the NRAS year; and

(b) that is covered by the NRAS certificate; and

(c) from which a partnership, or the trustee of a trust, that is a member of the NRAS consortium derived rent during the NRAS year.

11. Under the present scheme, paragraphs 380-13(a) and 380-13(b) of the ITAA 1997 will be satisfied where the Approved Participant derives NRAS rent from a dwelling for which it has received an NRAS certificate.

12. Paragraph 380-13(c) of the ITAA 1997 will be satisfied where the trustee of the Trust, which is a member of the NRAS consortium, derives rent during the NRAS year.

13. Therefore all the requirements of section 380-13 of the ITAA 1997 should be satisfied to treat the rent derived by the Trust as NRAS rent.

14. On the basis that the requirements of section 380-13 and subsection 380-14(1) are satisfied, subsection 380-14(2) would apply to deem the Trust to have been issued with a NRAS certificate in the relevant NRAS year.

Issue 1 Question 2

Will Investors be entitled to tax offsets pursuant to section 380-25 of the ITAA 1997 on the basis that NRAS rent flows indirectly to unitholders in the Trust?

Summary

Yes.

Detailed reasoning

Flow through of NRAS rent to unitholders

1. In respect to NRAS certificates issued to trustees, a unitholder who derives NRAS rent indirectly in an income year will be entitled to a tax offset in that income year under section 380-25 where the requirements of subsection 380-15(1) are satisfied.

Paragraph 380-15(1)(a) - The Housing Secretary issues an NRAS certificate in relation to an NRAS year to a trustee of a trust;

2. For the purposes of this ruling it is the trustee of the Trust will be deemed to have been issued with a NRAS certificate under section 380-14.

Paragraph 380-15(1)(b) - NRAS rent derived from any of the NRAS dwellngs covered by the NRAS certificate during the NRAS year flows indirectly to the unitholders in any income year;

3. NRAS rent will flow indirectly to the unitholder where the following requirements in subsection 380-25(3) are met:

Paragraph 380-25(3)(a) - during that income year, the NRAS rent is *derived by the trustee of the trust, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and

4. This paragraph will be satisfied as the trustee of the Trust is deemed to derive NRAS rent for the reasons explained in question 1.

Paragraph 380-25(3)(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 (ITAA 1936); or


(ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act;

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

5. This paragraph will be satisfied where Investors are presently entitled to a share of the net income of the Trust for an income year and that share will be covered by paragraph 97(1)(a) of the ITAA 1936.

Paragraph 380-25(3)(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).

6. Subsection 380-30(2) provides that an entity's share of the NRAS rent is an amount notionally allocated to the entity as its share of the NRAS rent, whether or not the entity actually receives any of that NRAS rent.

7. That amount is equal to the entity's share of the NRAS rent as described in the table in subsection 380-30(3).

8. Item 3 of the table is relevant to the arrangement to the extent NRAS rent is derived by the trustee of the Trust and the unitholder has a 'share amount' under subsection 380-25(3).

9. The Investor's share of the NRAS rent is defined in column 3 to be "so much of the amount worked out under column 2 of this item [i.e. the NRAS rent, where the Trust has a positive amount of net income for that year] as is taken into account in working out that share amount".

Paragraph 380-15(1)(c) - the offset year of the partnership or trustee begins in the NRAS year; and

10. The offset year commences on 1 July 2013 and falls within the NRAS year ending on 30 April 2014. Therefore paragraph 380-15(1)(c) should be satisfied.

Paragraph 380-15(1)(d) - the entity is:

(i) an individual; or

(ii) a *corporate tax entity when the NRAS rent flows indirectly to it; or

(iii) the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for the offset year; or

(iv) the trustee of an *FHSA; or

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

11. Investors are likely to be individuals or superannuation funds who satisfy paragraph 380-15(1)(d).

Amount of the tax offset

12. The amount of the tax offset is the sum of the amounts worked out using the formula in subsection 380-15(2) for each NRAS dwelling from which there is NRAS rent: