Edited version of your private ruling

Authorisation Number: 1012571157598

Ruling

Subject: NRAS - non assessable non-exempt income

Question 1

Is the proposed arrangement between the parties considered a NRAS consortium?

Answer

Yes

Question 2

Is the State Government Incentive under the NRAS non assessable non-exempt income in the hand of an entity (other than the owner of the NRAS dwelling) that is a participant in an NRAS consortium arrangement?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

 the application for private ruling, and

· the documents provided with the application for private ruling.

The Applicant is an Approved Participant for the purposes of the NRAS Act.

The Applicant intends to form a Non Entity Joint Venture (NEJV) with an NRAS dwelling owner (the Investor) and another entity (Entity).

Under the NEJV agreement:

· The NEJV will be set up as a NRAS Consortium for the purposes of the National Rental Affordability Scheme Act 2008 (NRAS Act) and the Income Tax Assessment Act 1997 (ITAA 1997)

· The Investor will supply an NRAS dwelling as a member of the NEJV for participation in National Rental Affordability Scheme

· The Entity will provide tenancy management services for the NRAS dwelling,

· The Applicant provides NRAS compliance management services to the Investor.

The State Government will pay the Applicant, as the Approved Participant, an amount representing the State Government's contribution to the incentives under the National Rental Affordability Scheme (the State Government Incentive).

The Applicant, the Investor and the Entity agree, under the NEJV agreement, that:

· The Applicant will retain X% of the State Government Incentive, and

· The Entity will be paid X% of the State Government Incentive.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 26(g)

Income Tax Assessment Act 1997 section 380-35

Income Tax Assessment Act 1997 subsection 955-1(1)

National Rental Affordability Scheme Act 2008 section 4

National Rental Affordability Scheme Act 2008 section 5

National Rental Affordability Scheme Regulations 2008 regulation 3

Reasons for decision

Summary

In this situation, it is accepted the arrangement described constitutes an NRAS Consortium. The State Government Incentive under the NRAS is non-assessable non-exempt income in the hand of a participant in the NRAS consortium arrangement who is not the owner of the NRAS dwelling.

Question 1

An 'NRAS consortium' is defined in subsection 995-1(1) of the ITAA 1997 to be a consortium, joint venture or non-entity joint venture, established by one or more contractual arrangements, the purpose of which are to facilitate the leasing of NRAS dwellings;

An NRAS consortium is a consortium, joint venture or non-entity joint venture established by a contractual arrangement that facilitates the leasing of approved rental dwellings under NRAS.

'Consortium' is not defined by the ITAA 1997, so its ordinary meaning must be considered. The Macquarie Dictionary (third edition) defines consortium as:

…an association or union…

And further defines 'association' and 'union' as:

Association:

…an organisation of people with a common purpose and having a formal structure…

Union:

…a number of persons, societies, states, or the like, joined together or associated for some common purpose…

'Member' of an NRAS consortium is provided in paragraph (e) of the definition of 'member' in subsection 995-1(1) of the ITAA 1997 to mean an entity that is a party to the contractual arrangements that established the NRAS consortium;

In this case, it is accepted the arrangement described constitutes an NRAS Consortium.

Question 2

The relevant provision for making the State Government Incentive non-assessable non-exempt income is section 380-35 of the ITAA 1997:

380-35 Payments made and non-cash benefits provided in relation to the National Rental Affordability Scheme

A payment made to you, or a *non-cash benefit provided to you, (whether directly or indirectly, such as through an *NRAS consortium of which you are a *member) by:

(a) a Department of a State or Territory; or

(b) a body (whether incorporated or not) established for a public purpose by or under a law of a State or Territory;

in relation to your participation in the *National Rental Affordability Scheme is not assessable income and is not *exempt income.

The current wording of section 380-35 of the ITAA 1997 takes into account the amendments made by Tax Laws Amendment (2001 Measures No. 5) Act 2011 which expands the application of the section to indirect payment of the State Government Incentive to a taxpayer.

From paragraphs 3.76 and 3.77 of the explanatory memorandum to the Tax Laws Amendment (2001 Measures No. 5) Bill 2011 (the EM), it appears that, unlike the provisions for the NRAS tax offset, the Parliament intends for the amended section 380-35 to apply widely to payments received by a taxpayer directly or indirectly, without requiring the taxpayer to be a recipient of NRAS rent or an owner of a NRAS dwelling:

3.76 NRAS-related payments made (and non-cash benefits provided) by a state or territory government are non-assessable non-exempt income. [Schedule 3, item 10, section 380-35]

3.77 This is the case whether such payments are received by a taxpayer directly or indirectly (for example, from another member of their NRAS consortium). [Schedule 3, item 10, section 380-35]

While not as general as paragraphs 3.76 and 3.77, the example in the EM shows that the Parliament did not intend the distribution of the State Government incentive (and consequently the ability to treat the amount as non-assessable non-exempt income) to follow that of the NRAS rent (and consequently the entitlement to the tax offset) or the ownership of the NRAS dwelling as the example made no reference to the NRAS rent:

Example 3.45: Treatment of a state government NRAS-related payment received indirectly by the taxpayer

Mr Smith is part of the XYZ Housing Group, an NRAS consortium providing 400 rental dwellings under the NRAS across South Australia. Mr Smith owns one of these dwellings.

The South Australian Government elects to make its contribution to the NRAS incentive through a cash payment. In the case of NRAS consortiums, the South Australian Government makes a single cash payment to the approved participant of the consortium, in respect of all of the dwellings operated by the consortium which are eligible for an NRAS incentive.

In 2010-11, all of XYZ Housing Group's dwellings are eligible for the full NRAS incentive. Accordingly, the South Australian Government makes a payment in May 2011 to the approved participant of XYZ Housing Group of $914,000 (that is, $2,285 * 400).

This amount is non-assessable non-exempt income in the hands of the approved participant of XYZ Housing Group.

The practice of XYZ Housing Group is to have the economic benefit of the NRAS incentive flow to the individual dwelling owners. Accordingly, in May 2011 the manager makes a payment of $2,285 to Mr Smith.

This amount is an NRAS-related payment made by a state government which is received indirectly by Mr Smith. Therefore, it is non-assessable, non-exempt income. (emphasis added)

In fact, by the way the example was worded, example 3.45 of the EM can be interpreted as putting the focus on the practice of the relevant NRAS consortium rather than the role the recipient of the payment plays in the NRAS consortium.

Such broad interpretation is supported by the fact that the section 380-35 of the ITAA 1997 refers to 'you' instead of requiring the entity to be issued with an NRAS certificate or referring to 'a member of an NRAS consortium'.

The payment of State Government Incentive from the State Government to the Applicant

As stated in the example 3.45 of the EM, in the first instance, when the Applicant receives the payment of State Government Incentive as the approved participant, that payment is non-assessable non-exempt income in the hands of the Applicant. This is regardless of the fact that the Applicant is not an owner of an NRAS dwelling.

The retention of State Government Incentive by the Applicant and the payment of State Government Incentive to QPA

Based on the interpretation above, if the Applicant, the Investor and the Entity have agreed, as a practice of the NEJV, to have the economic benefit of the State Government Incentive to flow to the Applicant and the Entity in a proportion and the State Government Incentive has been paid to the Applicant and the Entity in accordance with that practice, it is arguable that the proportion of the State Government incentive received by the Applicant and the Entity is an NRAS-related payment made by a state government, which is received by the Applicant and the Entity indirectly. Following example 3.45, those amounts are therefore non-assessable, non-exempt income.

It arguable that such interpretation is too broad. One argument is that 'in relation to your participation' should be interpreted more narrowly such that because the payment was retained by the Applicant and paid to the Entity in relation to the services they provide to the NRAS consortium, the payments were not made to the Applicant and the Entity in relation to their participation in the National Rental Affordability Scheme. Consequently, the payment is not non-assessable non-exempt income.

The phrase 'in relation to' was considered by the High Court in PMT Partners Pty Ltd (In Liquidation) v. Australian National Parks & Wildlife Service (1995) 184 CLR 301. Brennan CJ, Gaudron and McHugh JJ observed, in considering the application of the Commercial Arbitration Act 1985 (NT), at 313:

Inevitably, the closeness of the relation required by the expression 'in or in relation to' in s 48 of the Act, indeed, in any instrument - must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears.

Toohey and Gummow JJ in the same case also observed at 330-331:

It is apparent that the words 'in or in relation to' are particularly wide. ... Cases concerning the interpretation of this phrase in other statutory contexts are of limited assistance. However, the cases do show that the words are prima facie broad and designed to catch things which have sufficient nexus to the subject. The question of sufficiency of nexus is, of course, dependent on the statutory context...

…

The connection which is required by the phrase 'in relation to' is a question of degree. There must be some "association" which is "relevant" or "appropriate". The question of the relevance or appropriateness of the connection is a question which cannot be divorced from the particular statutory context.

In First Provincial Building Society Limited v. Federal Commissioner of Taxation (1995) 56 FCR 320; (1995) 95 ATC 4145; (1995) 30 ATR 207, Hill J. considered the phrase 'in relation to' within the context of paragraph 26(g) of the Income Tax Assessment Act 1936. He considered the words 'in relation to' in that context included a relationship that may either be direct or indirect, provided that the relationship consisted of a real connection, but that a merely remote relationship is insufficient.

'National Rental Affordability Scheme' is defined in subsection 995-1(1) of the ITAA 1997 to have the same meaning as in the NRAS Act.

Section 4 of the NRAS Act defines 'National Rental Affordability Scheme' to mean the scheme prescribed for the purposes of section 5.

Section 5 of the NRAS Act provides that:

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

following matters:

(a) the approval of participants (approved participants) by the Secretary;

(b) the approval of rental dwellings by the Secretary;

(c) providing incentives to an approved participant if certain conditions are satisfied;

(d) a matter required or permitted by this Act to be included in the Scheme;

(e) ancillary or incidental matters.

Regulation 3 of the National Rental Affordability Scheme Regulations 2008 (NRAS Regulations) provides:

For section 5 of the Act, these Regulations constitute the National Rental Affordability Scheme (the Scheme).

The NRAS Regulations deal with the process to make an application for allocations, the process for determining allocations, the process for receipt of incentives and other ancillary matters such as record keeping under the National Rental Affordability Scheme.

The services the Applicant and the Entity provide to the NRAS consortium relate to complying with the requirements of the National Rental Affordability Scheme. Consequently, in our view, the retention by the Applicant and payment to the Entity are appropriately connected to the National Rental Affordability Scheme and not too remote.

Furthermore, seeing the Parliament clearly anticipates NRAS consortiums being formed by entities pooling their separate resources to participate in the National Rental Affordability Scheme, it is our view that if the Parliament intends that not all contributions by a member of an NRAS consortium will be regarded as participation in the National Rental Affordability Scheme, the EM would have specifically state so.

Consequently, it is our view that section 380-35 of the ITAA 1997 applies to the amount of State Government Incentive retained by the Applicant and the amount of State Government Incentive paid to the Entity to treat them as non-assessable non-exempt income in the hand of the Applicant and the Entity respectively.