Edited version of your private ruling

Authorisation Number: 1012583090808

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.

Question 3

Where a trust passes its share of the State Government Incentive to individual beneficiaries via a second trust, will the income remain non-assessable non-exempt income in the hands of the individual beneficiaries?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

Entity Z is an approved participant for the purposes of the National Rental Affordability Scheme Act 2008 (NRAS Act).

Entity Z intends to form a non-entity joint venture (NEJV) with an NRAS dwelling owner and Entity Y.

Under the NEJV agreement:

· the NEJV will be set up as a NRAS consortium for the purposes of the NRAS Act and the Income Tax Assessment Act 1997 (ITAA 1997)

· the NRAS dwelling owner will supply a dwelling as a member of the NEJV for participation in NRAS, and

· Entity Y will provide tenancy management services for the NRAS dwelling

The State Government will pay Entity Z, as the approved participant, an amount representing the State Government's contribution to the incentives under the NRAS (the State Government Incentive).

Entity Z, the NRAS dwelling owner and Entity Y agree, under the NEJV agreement, that:

· Entity Z will retain a percentage of the State Government Incentive, and

· Entity Y will be paid the remaining percentage of the State Government Incentive.

Entity Y is a trust. Trust X is a beneficiary of Entity Y. The beneficiaries of Entity X are individuals.

Enity Y will distribute their share of the State Government Incentive to Trust X who will, in turn, distribute the State Government Incentive to the individual beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 Paragraph 26(g)

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1997 Section 380-35

Income Tax Assessment Act 1997 Subsection 995-1(1)

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 the participant in the NRAS consortium arrangement who is not the owner of the NRAS dwelling. The State Government Incentive passed from Entity Y to individual beneficiaries through Trust X will remain non-assessable non-exempt income in the hands of those beneficiaries.

Detailed reasoning

NRAS Consortium

An NRAS consortium is a consortium, joint venture on non-entity joint venture, established by one or more contractual arrangements, the purpose of which is to facilitate the leasing of approved rental dwellings under NRAS.

The term '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 …

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

In this case it is accepted that the arrangement described constitutes an NRAS consortium.

State Government Incentive - QGUT

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

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 the Tax Laws Amendment (2001 Measures No. 5) Act 2011 which expands the application of the section to indirect payments 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 of the ITAA 1997 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 an 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 them 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 dwellings operated by the consortium which are eligible for an NRAS incentive.

In 2010-11, all of XYZ's 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 is 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 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 the State Government Incentive from the State Government to Entity Z

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

The retention of the State Government Incentive by Entity Z and the payment of the State Government Incentive to Entity Y

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

It is arguable that such an 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 Entity Z and paid to Entity Y in relation to the services they provide to the NRAS consortium, the payments were not made to Entity Z and Entity Y in relation to their participation in the NRAS. 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. Australia 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 or 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 (ITAA 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 [of the NRAS Act].

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 NRAS.

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

Furthermore, seeing the Parliament clearly anticipates NRAS consortiums being formed by entities pooling their separate resources to participate in the NRAS, 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 NRAS, 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 Entity Z and paid to Entity Y to treat them as non-assessable non-exempt income in the hand of Entity Z and Entity Y respectively.

State Government Incentive -Trust beneficiaries

Section 97 of the ITAA 1936 states that the non-assessable non-exempt income of a beneficiary shall include the beneficiary's individual interest in the non-assessable non-exempt income of the trust estate.

Thus, the income distributed to the beneficiary retains the character it held within the trust provided the trust has not used that income for another purpose. For example, if the trust received exempt income and placed those funds in an interest bearing bank account, the interest earned and distributed to the beneficiary would be assessable to the beneficiary and not treated as exempt income.

In this situation:

(a) Entity Y receives a percentage of the State Government Incentive which is considered to be non-assessable non-exempt income

(b) Entity Y distributes the State Government Incentive income to Trust X - as the income was non-assessable non-exempt income for Entity Y it will retain its character when distributed to Trust X

(c) Trust X distributes the State Government Incentive income to its beneficiaries. Again, the distribution will retain its non-assessable non-exempt income character.

The distribution of the State Government Incentive payment from Entity Y to individual beneficiaries does not affect the character of the income even though it has passed through an intermediary trust. Therefore, each individual beneficiary's portion of the State Government Incentive payment will be non-assessable non-exempt income.