Private ruling: Income tax - assessable income
Date of advice: 26 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: During the income year ended 30 June 2011

Ruling: Q1: Will any NRAS incentives received by the Investors indirectly through a National Rental Affordability Scheme (NRAS) approved participant, in relation to the Investors' NRAS dwelling, constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) to the Investors? | A1: No.

Relevant facts and circumstances: NRAS The NRAS is designed to encourage large-scale investment in affordable housing. The NRAS offers tax and cash incentives to providers of new dwellings on the condition that they are rented to low and moderate income households at 20% below market rates. The NRAS offers annual incentives for a period of 10 years. The incentive comprises: • a Federal Government contribution in the form of a refundable tax offset; and • a State or Territory contribution in the form of direct financial support or an in-kind contribution. The incentives are indexed in line with the rental component of the consumer price index and the Department of Social Services (DSS) is responsible for administering and implementing the scheme. The Investors The Investors own a real estate property (the Dwelling) which is an 'approved rental dwelling' as defined in the National Rental Affordability Scheme Regulations 2008 (NRAS Regulations) and an 'NRAS dwelling' as defined in subsection 995-1(1) of the ITAA 1997. The Investors derive 'NRAS rent' from the Dwelling, which is tenanted by one or more 'eligible tenants' as defined in the NRAS Regulations. The lease of the Dwelling is between the Investors and the eligible tenant(s). The Investors executed a Contract with Entity A to enable their participation in the NRAS for the 'incentive period', defined in the National Rental Affordability Scheme Act 2008 to mean 10 years, by virtue of the inclusion of the Dwelling in Entity A's portfolio of properties made available to eligible tenants. Entity A is an 'approved participant' for the purposes of the NRAS Regulations and an 'NRAS approved participant' as defined in subsection 995-1(1) of the ITAA 1997. As the approved participant, Entity A receives any NRAS tax offset and State or Territory NRAS incentive payment provided in respect of the Dwelling (the NRAS incentives). The Contract provides the following: • At the request of Entity A, the Investors appoint Entity B as the managing agent of the Dwelling for the incentive period. • The Investors authorise Entity B to rent out the Dwelling at the appropriate rental prescribed under the NRAS to eligible tenants. • In consideration of the Investors appointing Entity B as the managing agent of the Dwelling, Entity A agrees to pass on all the State or Territory NRAS incentive payments it receives in respect of the Dwelling to the Investors, less 10% of the total amount of the NRAS incentives received in respect of the Dwelling which shall be retained by Entity A as a handling and administration fee. • Payment of the State or Territory NRAS incentives will be made within five business days of Entity A receiving those incentives by way of payment to Entity B's trust account. • Entity A undertakes to maintain the Dwelling in its portfolio of properties and use its best endeavours to do all such acts required of it in order for it to meet the requirements of an approved rental dwelling. Entity B has a contract with the Investors to act as the managing agent of the Dwelling for the collection of rent and other property management services in return for consideration of a rent collection commission and associated fees. Assumptions This Ruling is made on the basis of the following assumptions: 1. An NRAS certificate covering the Dwelling will be issued by the Housing Secretary to Entity A, as the NRAS approved participant, in relation to the NRAS year ended 30 April 20YY and will not be withdrawn, revoked or otherwise cease to apply to the Dwelling. 2. The State or Territory NRAS incentive will be paid in respect of the Dwelling to Entity A, as the NRAS approved participant, in relation to the NRAS year ended 30 April 20YY. 3. The relevant income year for the Investors began on 1 July 20XX and ended on 30 June 20YY. 4. All dealings between the Investors, Entity A and Entity B are at arm's length.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 6 | Income Tax Assessment Act 1997 Subsection 6-1(5) | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-15(3) | Income Tax Assessment Act 1997 Section 6-23 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 8-1(2) | Income Tax Assessment Act 1997 Paragraph 8-1(2)(c) | Income Tax Assessment Act 1997 Division 380 | Income Tax Assessment Act 1997 Subdivision 380-A | Income Tax Assessment Act 1997 Subsection 380-10(1) | Income Tax Assessment Act 1997 Paragraph 380-10(1)(a) | Income Tax Assessment Act 1997 Paragraph 380-10(1)(b) | Income Tax Assessment Act 1997 Paragraph 380-10(1)(c) | Income Tax Assessment Act 1997 Subsection 380-10(2) | Income Tax Assessment Act 1997 Section 380-35 | Income Tax Assessment Act 1997 Subsection 995-1(1) | National Rental Affordability Scheme Act 2008 | National Rental Affordability Scheme Regulations 2008 Further issues for you to consider | Rent assessable as ordinary income under section 6-5 | Section 6-5 of the ITAA 1997 includes income according to ordinary concepts (ordinary income) in assessable income. Whether or not a particular amount is income according to ordinary concepts depends on the nature and character of the receipt in the hands of the taxpayer. | Typically, the receipt of rent is ordinary income. Accordingly, the NRAS rent derived by the Investors from an eligible tenant in respect of the Dwelling is ordinary income, assessable under section 6-5 of the ITAA 1997 in the income year of receipt. | Property management and other fees | Section 8-1 of the ITAA 1997 provides the provisions for general deductions. | Subsection 8-1(2) of the ITAA 1997 explains that you cannot deduct a loss or outgoing under this section to the extent that: | (a) it is a loss or outgoing of capital, or of a capital nature; or | (b) it is a loss or outgoing of a private or domestic nature; or | (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or | (d) a provision of this Act prevents you from deducting it. Pursuant to paragraph 8-1(2)(c) of the ITAA 1997, the property management fees, handling and administration fees payable by the Investors are not deductible under section 8-1 to the extent that they are incurred in relation to gaining or producing non-assessable non-exempt income (NANE income). | Accordingly, such fees must be apportioned on a reasonable basis, limiting a claim for any deduction to the portion of costs relating to the derivation of assessable income in the form of NRAS rent.

Reasons for decision: Summary: NRAS incentives received by the Investors indirectly through the NRAS consortium of which they are a member will not constitute assessable income of the Investors. | Detailed Reasoning - Are the Investors a member of an NRAS consortium?: An NRAS consortium is defined in subsection 995-1(1) of the ITAA 1997 to mean a consortium, joint venture or non-entity joint venture: (a) established by one or more contractual arrangements, the purpose of which are to facilitate the leasing of NRAS dwellings; and (b) that is not a corporate tax entity, a superannuation fund, a trust or a partnership. As a consortium that is not a corporate tax entity, a superannuation fund, a trust or a partnership, and a consortium that is established by a contractual arrangement with the purpose of facilitating the leasing of an approved NRAS dwelling, the consortium between Entity A, Entity B and the Investors constitutes an NRAS consortium in respect of which the provisions of Division 380 of the ITAA 1997 may apply. | Detailed Reasoning - NRAS incentives receivable by the investors: NRAS tax offset Subdivision 380-A sets out the conditions under which a taxpayer may be entitled to a tax offset under NRAS. In particular, subsection 380-10(1) of the ITAA 1997 states that: A member of an NRAS consortium is entitled to a tax offset for an income year if: (a) the Housing Secretary issues an NRAS certificate in relation to an NRAS year to the NRAS approved participant of the NRAS consortium; and (b) the income year commences in the NRAS year; and (c) the member is an individual, a corporate tax entity or a superannuation fund. Subsection 380-10(2) of the ITAA 1997 states that: The amount of the tax offset is the total of the amounts worked out using the following formula for each NRAS dwelling: (a) covered by the NRAS certificate; and (b) from which the member derives NRAS rent during the NRAS year: Amount stated in the NRAS certificate for the NRAS dwelling × NRAS rent derived by the member from the NRAS dwelling during the NRAS year Total NRAS rent derived from the NRAS dwelling during the NRAS year Pursuant to assumption 1 of this ruling, Entity A will, as the NRAS approved participant of an NRAS consortium, be issued with an NRAS certificate from the Housing Secretary in relation to the NRAS year ended 30 April 20YY, thus satisfying the requirement of paragraph 380-10(1)(a). Pursuant to assumption 3 of this ruling, the relevant income year for the Investors began on 1 July 20XX and ended on 30 June 20YY. That income year of the Investors, being an income year in which entitlement to a tax offset is assumed to arise, therefore began in the corresponding NRAS year, thus satisfying the requirement of paragraph 380-10(1)(b). As individuals, the Investors also satisfy the requirement of paragraph 380-10(1)(c). Having satisfied each of the requirements set out in subsection 380-10(1), the Investors (being a 'member' of an NRAS consortium as defined in subsection 995-1(1) of the ITAA 1997) will be entitled to a tax offset for the income year ended 30 June 20YY pursuant to subsection 380-10(1) of the ITAA 1997, equal to an amount calculated under subsection 380-10(2) of that Act. The amount of a tax offset calculated under subsection 380-10(2) of the ITAA 1997 does not constitute assessable income under section 6-5 of the ITAA 1997, or any other provision of that Act. State or Territory NRAS incentive payment Division 6 of the ITAA 1997 provides core provisions of income and the meaning of assessable income. Subsection 6-1(5) of the ITAA 1997 states that: An amount of ordinary income or statutory income can have only one status (that is, assessable income, exempt income or non-assessable non-exempt income) in the hands of a particular entity. Subsection 6-15(3) of the ITAA 1997 states that: If an amount is non-assessable non-exempt income, it is not assessable income. Section 6-23 of the ITAA 1997 states that: An amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or of another Commonwealth law states that it is not assessable income and is not exempt income. Section 380-35 of the ITAA 1997 states that: 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. Pursuant to section 380-35 of the ITAA 1997, a cash payment made to the Investors indirectly through the NRAS consortium of which they are a member by a Department of a State or Territory in relation to the Investors' participation in the NRAS will be NANE income of the Investors. Accordingly, subsection 6-15(3) of the ITAA 1997 will apply and the cash payment made to the Investors indirectly through the NRAS consortium (via Entity A and in accordance with the terms of the Deed of Agreement) in relation to the Investors' participation in the NRAS will not be assessable income under section 6-5 of the ITAA 1997, or any other provision of that Act.