Tax Tax 70: NRAS Property and Deductibility of Interest and other expenses

NRAS property investors receive government incentives to provide property available for rent at under market value rents.

There are 2 incentives:

• a Commonwealth Government incentive made by way of a refundable tax (Division 380 of the Income Tax Assessment Act 1997 (ITAA 1997)
• a cash payment from the relevant state government, which is Non-Assessable Non-Exempt (NANE) income (section 380-35 of the ITAA 1997).

The ATO consider that there are 2 objectives when investing in NRAS property:

• Deriving assessable income in the form of rent, and
• the receipt of government incentives, including state government NANE income

Interest and other costs are only deductible because of s8-1 ITAA97. However a subsection of s8-1(2)(c), says that a loss or outgoing cannot be deductible to the extent that it relates to NANE income.

This is the reason the full amount of the interest deduction is not available for money borrowed to purchase NRAS property.


How to work out the portions relating to each part?

Generally this apportionment of expenses would be made using the following formula to calculate the percentage of deductible expenses:

Percentage of deductible expenses = (A x B) / (B-C)

• A = Otherwise deductible expenses
  
  
• B = assessable rental income derived from the property
  
  
• C = NANE income associated with the property (state government incentive)

Summarised from PBR 7189
https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/7189.htm

See also
PBR Authorisation Number: 1012035091677
https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1012035091677.htm

 

Thanks to @smallbuyer for bringing this to my attention in https://propertychat.com.au/community/threads/nras-property-expences.5196/

 

Interesting that the ruling ignores the commonwealth incentive amount which is also exempt income like the state govt amount (the tax credit is claimed at Item 13). Applying the logic in the BPR they should also do same to state + commonwealth incentives as exempt income so that the non-deductible is in same ratio as all exempt income.

Until the ATO issues a Public Ruling nobody other than the BPR applicant should follow this ruling. And NOBODY should ask the ATO to issue one. Only if they issue one may amendment be required. I would doubt such a ruling would pass the public interest test.

IMO the incentive is maybe not NANE. And all rulings issued to NRAS providers are inconsistent.

 

The commonwealth incentive is a tax offset I think.

 

Question is more about whether a state incentive is NANE is a two limb issue.
1.Is it Income ?...If so then
2.Is the income NANE ?

A tax offset isnt income either.

One for those Masters like Mike, Rob etc....

 

The Federal component is a refundable tax offset.

Bottom line - show me anyone other than the one guy who went and got this private ruling, who has ever been asked to apportion anything related to expenses associated with any NRAS approved dwelling, since 2008/9. There are over 30,000 NRAS delivered of the 40,000 due to be delivered, and lots of NRAS investors have lodged lots of tax returns in that time , so someone should be able to provide something more than a 2012 private ruling that has never been enforced on anyone than the applicant for the ruling, if this is any form of an issue at all.

 

Do a search for "NRAS" on the PBR register and you will find many, not all are about this topic but many are.
https://www.ato.gov.au/rba/search/?kw=NRAS&sc=1&ps=10&pi=1

The fact that people are getting away with something, such as claiming extra tax for something they are not entitled to, doesn't mean it is not an issue.

It could be a major issue for someone with multiple properties that had been claiming extra over many years.

 

I'm one of those with many properties who has claimed deductions over many years and I have been audited. We can all go around and around on this but pretty much no one appears able to demonstrate this has, is or will be applied. If applied the impact is modest. If not applied - business as usual.

 

I have had people tell me that stockings are deductible because they wear them to work. They may get audited and not have it picked up. But that doesn't mean it is a legal deduction.

 

I have noticed that the ATO have updated their website recently to say that appointment is necessary.

Let's say apportionment is required, could you please provide an example of how to use your formula. I'm not sure if I have missed something, but I can't get it to work properly.

Further, how would you apply the apportionment in the first year? Would you bring in the state government portion into the formula even though you don't physically receive it until the following financial year?

 

I am unable to provide an example as I have never participated in NRAS.

Income is assessed when it is derived.

 

I lodged an amendment with my NRAS for 2013/14 to claim extra that I'd missed, and it took 12 weeks so I assume they were actually looking at it.

This is the method I used and explained in my amendment, and they seemed to accept it:
1st year (2013/14) - 100% claimable as the NANE not received until 2014/15
2nd -10th years - apportion based on discounted rent received in relevant year plus NANE received in year even though it relates to prior NRAS year
11th year - apportion based on rent received in year (which will be higher as the 20% discount no longer applied) and NANE received in relation to 10th NRAS year

Not advice. Just the way I did it

 

Oh, I think i see your confusion di_16. Terry, you've got a - instead of a + in the formula.

Apportionment % is: Assessable Income/Total Income
(Total Income = Assessable income + NANE)

So if I got $15,000 rent and $2,500 State Gov't NANE, my claimable percentage is $15,000/$17,500 = 85.71%
Each expense is multiplied by 85.71% to work out your deduction.

 

Hi Kirsti, i got that formular from the PBR that I quoted above and on checking it they do have a minus there B-C, so I checked the second one and it also had B-C:

• 
  But what you write appears to make better sense. I have never owned NRAS or come a client who has so I don't know how this works in practice. Best for people with NRAS to check with their tax agents.

 

wow... maybe I should apply their formula and claim a 120% deduction!
(15000/(15000-2500)) = 1.2

 

The $15K NRAS entry fee is not a factor in the calculation. Its capital expenditure which may (or may not) add to the cost base.

 

So is this a private ruling or has the ATO determined egveryone has to prorata your deductions for NRAS now? Im pretty sure all the advertising material for NRAS properties had statements and calculations that show 80% rent, 100% deductions with reference to various ATO rulings on the matter.

On another matter with relation to the calculation of the deduction, what about when the house is available for rent but unrented (or the tenant bails and doesnt pay rent)? eg your rent (after 20% deduction) is 300pw. If the place is vacant for 10 weeks your annual rent would be 12600 and NANE 2500 = 83.4% deductions claimable but if the rent for the unrented period was included it would be $15600 and NANE $2500 = 86.2% deductible

Any ideas?

 

There has been no public ruling issued. Taxpayers are not obliged to follow the view in a Private Ruling. Private rulings are non-binding subject to general tax law...This issue is general tax law. That said I don't disagree with Terry either. The class / specific product etc rulings etc given to many NRAS providers is silent on this issue and overlooked the issue even in examples. I suspect there is a issue with Treasury to address this based on the silence on this issue OR the ATO are concerned if they give a ruling it will upset many. In the past the Tax Liaison minutes would have indicated if they have this issue under review and how.

 

The problem is that deductions are not able to be claimed where the expenses relate to non assessable non exempt income. So at law the expenses must be apportioned and not claimed in full in this situation.

 

Seems ATO are slowly addressing this issue. Recent change to website is below. At least they are now explaining that the apportionment applies to general expenses, borrowing expenses, interest, depreciation and capital allowance deductions. The question of when NANEI is derived (timing issues) isn't addressed. For example if state gov't calculate and pay the 2015 incentive in 2016 ....which NANEI is used in which year for the apportioning ??

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