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

Clear as mud as usual.

 

I consider the State Govt incentive should be factored into the NANE apportionment in the year to which it is incurred as income rather than when received. (after the year of income)

My reasoning is that non assessable non exempt state govt incentives are expected and attribute to the reduced rents received through the year. Thus a solid basis of being incurred is established by being registered and having that expectation.

I would consider using the cash basis of dealing with the state govt incentive to be incorrect.

 

so what are people going to do this year when lodging their NRAS tax returns?
Claim 100% of expenses?
Claim a lesser amount?
If lesser based on last years NANE or this years?
How will you be doing the calculation?

 

I'm aware of at least 1 NRAS participant (i.e. the institution with the NRAS allocation) that has tried to work around the apportionment issue by the investor foregoing their right to received the State Government incentive. The State Government incentive is instead received by the participant and the property manager in return for a reduction in the fees that would otherwise be payable to these entities by the investor.

The argument is that as the investor doesn't receive the State Government incentive (NANE income) there is no need to apportion. I'm not 100% convinced it works because there could still be constructive receipt but it is probably enough for a reasonably arguable position.

The State Government incentive is defined to be NANE in s 380-35.

 

The constructive receipt argument strengthened by being able to entitled to receive a state govt incentive and then exchanging the right to a third party for a fee reduction.

Unless I see a ruling issued to the relevant NRAS provider that specifically addresses the above scheme I would apportion.

My year end tax checklist (2016) will include seeking information about state govt 2016 year incentives (not 2015 paid in 2016) so that the NANE apportioning is made correctly. I suspect all taxpayers who use an accountant who uses a low value pool amount included at label D6 will have themselves a more complex issue this year !!

 

You would need to check the legislative scheme, but I think that it is the NRAS participant that is primarily entitled to the State Government incentive and it is only through their contract with the NRAS participant that the investor becomes entitled to it. So if the contract doesn't provide the investor with an entitlement to the State Government incentive it's arguable that there never was such an entitlement.

 

Paul, I would have thought that cash accounting was the proper method (so NANE is declared in the year received, not the NRAS year it relates to). Individual taxpayers are not generally able to use accrual accounting are they? And if they did wouldn't it mean that any prepaid interest/insurance etc would also need to be accounted for under the accrual method instead of cash?

I think deferring the NANE recognition into future years is more beneficial anyway (claim higher % immediately, and if you use diminishing value depreciation at the same time this could be substantial), so I will keep arguing that it should be based on cash accounting.

I originally lodged my 2014 tax return by apportioning against the 2014 NANE. I later lodged an amendment claiming a misunderstanding - as the NANE was not received until 2015 the apportionment should have applied to 2015, not 2014. They assessed, and agreed, so I got a further 2014 refund which is worth a lot more to me than any future promise of a higher refund in 2024 (the year after my NRAS runs out but I will still have some lagging NANE).


Of course, not apportioning at all would be a much better financial outcome, but with all the references they are making it's pretty clear that apportionment is the proper method. I'm not game to risk my CPA accreditation by pushing the boundaries on this.

 

But I do like the idea of foregoing the State portion and then claiming 100%, even if it didn't equate to an equivalent reduction in expenses. Depending on the value of the property (and hence the size of their interest expense) some investors could come out better that way, and everyone would save time/hassle of working out the apportionment.

Consortium could end up really happy too. I did a quick scenario on my approx $400k property at 39% MTR and if my consortium kept the $2,600 per year instead of charging me $940 in "NRAS Administration Fees", I'd actually be $60 pa better off! (so break even allowing for error. 49% MTR would be about $450 pa better off)

@Daniel Taborsky - do you mind sharing which consortium it is?

 

NANE income is derived in the period of the income tax year. The very NANE issue that applies to NRAS is with reference to this offset entitlement being an expectation. This nexus poses the primary concern. The ATO view on NANE income refers to an expectation of it being received....There is no reference to actual receipt.

Careful with cash accounting..That's a business concept for the timing and recognition of income. There are many examples of non-cash issues for individual taxpayers:
- Land tax arrears
- Medical expenses tax offset v's paid after year end
- Reimbursed amounts where timing issues can arise
- Trust income (present entitlement)
s380-35 ITAA97 refers to a payment "made to you" to describe the state NRAS NANE. In the absence of a ruling I would be satisfied that this provision ties the NANE to the year of income and the rent received, certificate etc. LIkely a issue requiring clarrification but a statutory entitlement which is generally treated as derived rather than paid.

Note too that the NRAS year is 30 April and certificates relate to that year and are a tax offset in the year of income ended 30 June of that same year. s380-.5

The ATO will amend to whatever you indicate. Thats self assessment.

 

@Kirsti327 I'll send you a PM

 

There is a issue with foregoing state entitlements and when I read the Act it wasnt that promising.

s380-35 is a statutory rule re NANE and has a direct / indirect receipt or benefit rule. I would argue its an anti-avoidance rule precisely for the purpose of limiting such a scheme. The formula for member entitlement and % of offsets etc is based on Total rent and not net rent (See formula in s380-11 to 13)

 

The reference to a "non-cash benefit" in section 380-35 is there because it was initially contemplated that the State Government incentive may not be a cash payment as the following extract from the National Rental Affordability Scheme Policy Guidelines explains:

8.5. Receiving the State and Territory contributions of the Incentive as in-kind support
State and Territory contributions will take a variety of different forms. Some State and Territory Governments are contributing in-kind support, that is, they may provide land, reduce stamp duty requirements or reach other suitable arrangements with Approved Participants. Where this is the case Approved Participants may receive the State or Territory contribution upfront and will be required to enter into individual arrangements to ensure that these benefits are maintained for the required time.
​

I'm not 100% convinced that "foregoing" the State Government incentive works, but there's a decent argument for it.

 

When working out the apportionment would it be reasonable to do it based on the net-NANE income. Ie the NANE income less the direct costs involved to earn that income being the fees / percentage charged by the NRAS consortium? This is the NANE income that the investor receives.

Also the refundable tax offset is describe on the ATO website as income.

"The NRAS tax incentive is tax-free income and is comprised of two components."

As such shouldn't the federal tax offset income be included in the apportionment of expenses?

Also do these consortium fees need to be apportioned between the tax offset and the NANE payment so only the portion relating to the tax offset are included as a deduction?

 

Surely not "net NANEI", since this assumes relates to expenses relating to the state govt incentives is directly attributable.

A better approach could be that same as legislated for "eligible taxable income", i.e. Div 6AA income.

i.e. two types of expenditure relating to the incentives

1. Expenses directly related to the incentives (e.g. state program compliance costs); and

2. Expenses apportionable in relation to the incentives, i.e. those that relate to both the assessable income and the NANEI (e.g. general rental expenses).

Expenses under item (2) are the ones that require apportionment on a reasonable basis.

 

@Terry_w and others, would you care to comment on this private tax ruling.

RBA Content


thanks in advance

 

Pretty straight forward I think. Anything in paricular you want comments on?

The example given is good:

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

Assessable rental income derived from the property / (assessable rental income + NANE income associated with the property) x otherwise deductible expenses

For example:

Where you have reduced rental income of $20,000, NANE of $3,000 and rental expenses of $10,000:

• 
  $20,000 / $23,000 x $10,000 = $8,695.65
  

The deductible portion of the expenses is $8,695.65

 

@Terry_w, I understand that bit (painfully so), but I'm more interested in this:

"some of the expenses incurred to produce the NANE portion of the rental income maybe able to be included in the asset's cost base for CGT purposes."

In my reading, it would seem that I can take the $1304.35 portion ($10,000 - $8,695.65) and add that to the base cost of the asset to calculate CGT when the asset is sold. According to the ATO:

 

Yes, I did read that and wondered the same thing. I think those costs could be included when calculating the cost base when the property is sold.

This is something I hadn't considered so thanks for posting the PBR.

 

That's the way I interpreted the PBR too @LibGS. It appears logical to me but obviously an area where professional advice would be required.

 

Here is another ATO link:

National rental affordability scheme - refundable tax offset and other taxation issues