House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 3 - National Rental Affordability Scheme

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to address technical issues which have arisen from the interaction between the tax law and the National Rental Affordability Scheme Act 2008 (NRAS Act).

3.2 All references are to the ITAA 1997 unless otherwise stated.

3.3 These amendments also simplify the operation of the National Rental Affordability Scheme (NRAS) for participants and provide some additional flexibility to NRAS participants in how the incentive is shared between members of consortiums participating in the NRAS.

3.4 Specifically, these amendments:

•

replace the references in the NRAS provisions of the tax law to a non-entity joint venture with the broader concept of an NRAS consortium;

•

recognise that the Secretary of the Department that administers the NRAS (Housing Secretary) does not issue certificates under the NRAS Act to consortiums participating collectively, but rather to an approved participant (the entity that is complying with NRAS legislative requirements) of an NRAS consortium;

•

introduce an optional election to allow approved participants of NRAS consortiums to relinquish entitlements to a tax offset to certain other parties of their consortium; and

•

extend the tax exemption already applying to state and territory NRAS-related payments to include such payments which are received indirectly by a taxpayer (for example, from another member of their NRAS consortium).

Context of amendments

Background

3.5 The NRAS is a Government initiative to stimulate the supply of new affordable rental dwellings. The initiative commenced on 1 July 2008.

3.6 Qualifying participants in the NRAS are eligible to receive an annual NRAS incentive for up to 10 years for each approved dwelling which is rented according to the requirements of the scheme.

3.7 These requirements include being rented to low or moderate income households at 20 per cent below the market rate.

3.8 The NRAS incentive is $9,140 per dwelling in 2010-11, comprising $6,855 from the Australian Government and $2,285 from the States. These amounts are indexed annually in line with the rents component of the consumer price index.

3.9 The Australian Government component of the incentive is delivered through a refundable tax offset, with endorsed charitable institutions able to instead receive a cash payment.

3.10 Division 380 of the ITAA 1997 provides for the NRAS tax offset.

Technical issues to be addressed

3.11 Under the current legislation, taxpayers collectively participating in the NRAS (other than through a partnership or trust arrangement) must be operating through a non-entity joint venture. 'Non-entity joint venture' is defined by subsection 995-1(1) of the ITAA 1997. It requires the Commissioner of Taxation (Commissioner) to be satisfied of the presence of a contractual arrangement under which multiple parties undertake an economic activity that is subject to a 'control' test.

3.12 The requirements attached to meeting the definition of 'non-entity joint venture' are restrictive to participants in the NRAS and do not accommodate certain structures wanting to operate in the NRAS. This will be addressed by these amendments.

3.13 Joint ventures between property developers, property managers, and individual investors have so far proved a popular vehicle for participating in the NRAS, enabling the pooling of their separate resources to collectively meet the minimum dwellings requirement.

3.14 However, under such arrangements, joint ventures may be legally structured in a way that results in the approved participant (manager) deriving NRAS rent and the investor deriving ordinary rent (this arrangement was highlighted in the Australian Taxation Office Interpretive Decision (ATO ID) 2009/146). In these cases the manager, rather than the ultimate investor, would be the entity entitled to the tax offset as the manager is the entity deriving NRAS rent. This will be addressed by these amendments.

Summary of new law

3.15 Taxpayers are entitled to an NRAS tax offset, which is a refundable tax offset, in the following circumstances.

•

An individual, corporate tax entity or a superannuation fund is entitled to a refundable tax offset provided that the Housing Secretary has issued the particular entity a certificate under the NRAS. The amount of the tax offset is the amount stated in the certificate.

•

The partners of a partnership and the beneficiaries of a trust are entitled to a refundable tax offset provided that the Housing Secretary has issued their partnership or trust (or a partnership or trust through which their interest is ultimately obtained) a certificate under the NRAS. The amount of the tax offset is the amount stated in the certificate, shared between the partners of a partnership or the beneficiaries of a trust according to their proportion of the NRAS rent of the partnership or trust for the NRAS year.

•

A trustee of a trust (rather than the trust's beneficiaries) is entitled to a refundable tax offset provided that the Housing Secretary has issued the trustee a certificate under the NRAS and the trust has no net income. Similarly, a trustee of a trust (rather than the trust's beneficiaries) is entitled to a refundable tax offset if the NRAS refundable tax offset flows to this trust from another entity (because the trust is a party to a non-entity joint venture, the trust is a partner of a partnership, or the trust is a beneficiary of another trust which has net income) and the trust to which the offset flows has no net income. Trustees assessable on net income of the trust are also entitled to a share of the offset.

3.16 In addition to the above circumstances, groups of taxpayers collectively participating in the NRAS (via an NRAS consortium) may each become entitled to an NRAS tax offset.

3.17 A party to an NRAS consortium is entitled to an NRAS tax offset provided that the Housing Secretary has issued the approved participant of the consortium a certificate under the NRAS and the entity has been deriving NRAS rent.

3.18 The amount of the tax offset is the amount represented by the certificate shared between the members of the NRAS consortium according to their proportion of the NRAS rent from the NRAS dwelling for the NRAS year.

3.19 State and territory NRAS-related payments are non-assessable non-exempt income, whether received by a taxpayer directly or indirectly (for example, from another member of their NRAS consortium).

Comparison of key features of new law and current law

Detailed explanation of new law

3.20 When the National Rental Affordability Scheme Bill 2008 was introduced, the Government stated in Parliament that they expected the scheme would facilitate new and creative partnerships between institutional investors, developers and community housing providers.

NRAS consortiums

3.21 The definition of an 'NRAS consortium' recognises the existence of the new arrangements established for groups of taxpayers to participate collectively in the NRAS.

3.22 An NRAS consortium is defined as a consortium, joint venture or non-entity joint venture established by one or more contractual arrangements that facilitate the leasing of NRAS dwellings. [ Schedule 3, item 17, subsection 995-1(1 )]

3.23 An NRAS dwelling means an approved rental dwelling for the purposes of the regulations made under the NRAS Act. [ Schedule 3, item 18, subsection 995-1(1 )]

3.24 As the definition of 'NRAS consortium' includes non-entity joint ventures, the ongoing operation of section 380-10 of the ITAA 1997 for parties to existing non-entity joint ventures is assured.

3.25 In practice, many contractual arrangements may exist between different parties involved in various stages in preparing dwellings to be leased under the NRAS. The NRAS consortium definition recognises that multiple contractual arrangements may exist.

3.26 The contractual arrangements must facilitate the leasing of approved rental dwellings under the NRAS, however, the contractual arrangements may also deal with other things.

3.27 A corporate tax entity, superannuation fund, trust or partnership cannot be an NRAS consortium. However, they may be a member of an NRAS consortium. [ Schedule 3, item 17, subsection 995-1(1 )]

Members of an NRAS consortium

3.28 A member of an NRAS consortium is an entity that is a party to a contractual arrangement, or to one of the contractual arrangements, that established the NRAS consortium. A member of an NRAS consortium may not necessarily have been a party to the contractual arrangement at the time the NRAS consortium was established. [ Schedule 3, item 14, subsection 995-1(1 )]

3.29 In practice, individual entities will enter into an individual contractual arrangement with the approved participant in regard to the rental dwellings to be rented under the NRAS.

3.30 A partnership may also be a member of a consortium if all the partners of the partnership are parties to a contractual arrangement that established the consortium. [ Schedule 3, item 14, subsection 995-1(1 )]

3.31 The member of an NRAS consortium who is the approved participant represents the consortium when interacting with the Department of Sustainability, Environment, Water, Population and Community (DSEWPaC). [ Schedule3, item 15, subsection 995-1(1 )]

Example 3.38: NRAS consortium

Affordable Rental Housing Group is a consortium comprising a manager (Affordable Rental Solutions Company) and 200 individual dwelling owners.

Affordable Rental Solutions Company applies to the Housing Secretary to participate in the NRAS and effectively represents the parties to the consortium. It is the 'approved participant'.

The Affordable Rental Housing Group is a consortium established by contractual arrangements that facilitates the leasing of approved rental dwellings under the NRAS. It is an NRAS consortium.

Example 3.39: NRAS consortium

ABC Group is a consortium comprising an approved participant (Holding Pty Ltd), a tenancy manager (Real Estate Pty Ltd) and the owner of a rental dwelling.

There is a contractual agreement between Holding Pty Ltd and the owner of the rental dwelling, another contractual agreement between the owner of the rental dwelling and the tenancy manager and another between the tenancy manager and Holding Pty Ltd. All contractual agreements are to facilitate the leasing of approved rental dwelling under the NRAS.

ABC Group is an NRAS consortium.

Holding Pty Ltd, being the approved participant, represents the members of the consortium via interactions with the DSWEPaC.

Members of the NRAS consortiums are entitled to tax offsets

3.32 Members of an NRAS consortium are entitled to a tax offset for an income year if:

•

a certificate has been issued to the approved participant in relation to the NRAS dwelling;

•

the income year begins in the NRAS year to which the certificate relates;

•

the member is an individual, a corporate tax entity or a superannuation fund; and

•

the member has derived NRAS rent from an NRAS dwelling covered by the certificate during the NRAS year.

[ Schedule 3, item 1, subsections 380-10(1 ) and ( 2 )]

3.33 Section 380-10 of the ITAA 1997 deals with claims by a member of an NRAS consortium that is an individual, corporate tax entity or a superannuation fund. It is the mechanism by which groups of taxpayers collectively participating in the NRAS each become entitled to an NRAS tax offset.

3.34 As mentioned above, NRAS consortiums may be legally structured in many ways. In some cases investors may be deriving NRAS rent directly, while in other cases, where there is the presence of a head lease (between the investor and the manager) and sublease (between the manager and the eligible tenant), the manager of the rental dwellings will be the entity deriving NRAS rent and the investor will be deriving ordinary rent from the manager.

3.35 One element that needs to be satisfied for a member to be entitled to the NRAS tax offset under section 380-10 is that the member has derived NRAS rent. NRAS rent is defined as rent derived from a rental dwelling under the NRAS for an income year. [ Schedule 3, item 19, subsection 995-1(1 )]

Example 3.40: NRAS rent derived by the approved participant

Affordable Rental Housing Group is an NRAS consortium comprising a manager (Affordable Rental Solutions Company) and 200 individual dwelling owners.

Under this NRAS consortium, the individual dwelling owners enter into head leases with the Affordable Rental Solutions Company and then the company enters into subleases with the eligible tenants. (This arrangement is the same as the arrangement outlined in ATO ID 2009/146.)

As outlined in ATO ID 2009/146, in this situation the manager, Affordable Rental Solutions Company, is deriving NRAS rent and the individual dwelling owner is deriving ordinary rent. As such, the manager would be the entity eligible for the NRAS tax offset.

See paragraphs 3.52 to 3.75 on the election available for the manager to pass the incentive on to the dwelling owner.

Example 3.41: NRAS rent derived by the owner of the rental dwelling

ABC Group is an NRAS consortium comprising an approved participant (Holding Pty Ltd), a tenancy manager (Real Estate Pty Ltd) and the owner of a rental dwelling (DFJ Pty Ltd).

Under this NRAS consortium, the tenancy manager has the responsibility of managing the rental property and the approved participant has the responsibility of engaging with the DSEWPaC in regard to the NRAS obligations. Rent from the NRAS dwelling is paid through the tenancy manager directly to the owner of the rental dwelling and is considered to be NRAS rent paid to the owner.

As DFJ Pty Ltd has derived NRAS rent, it will be eligible to a tax offset for an income year if a certificate has been issued to the approved participant in relation to the NRAS dwelling and the income year begins in the NRAS year to which the certificate relates.

Certificates issued by the Housing Secretary

3.36 The approved participant will have notified the DSEWPaC of its role as representative of an NRAS consortium. In practice, the Housing Secretary will issue an NRAS certificate to the approved participant (which may be the manager) of an NRAS consortium. [ Schedule 3, item 16, subsection 995-1(1 )]

3.37 Certificates are issued to the approved participant regardless of whether the approved participant is the entity directly deriving NRAS rent.

3.38 A certificate issued under the NRAS in relation to the NRAS dwelling is a requirement that needs to be satisfied for a consortium member to be entitled to the NRAS tax offset under section 380-10. However, the certificate is not required to be issued to the same entity claiming the NRAS tax offset under section 380-10, it is simply required to be issued.

Amount of the tax offset

3.39 Members of an NRAS consortium are entitled to the portion of the total amount of the tax offset stated for each NRAS dwelling (stated in the certificate issued to the approved participant of the NRAS consortium), which is equal to their portion of the total NRAS rent derived from the NRAS dwelling during the NRAS year. [ Schedule 3, item 1, subsection 380-10(2 )]

3.40 In cases where only one member derives NRAS rent for an NRAS dwelling, that member will be entitled to the full amount stated in the certificate for that NRAS dwelling. Likewise, in cases where there are two members who have been deriving the NRAS rent in the ratio 30:70, the member deriving 30 per cent of the NRAS rent will be entitled to 30 per cent of the incentive stated in the certificate for the NRAS dwelling and the member deriving 70 per cent of the NRAS rent will be entitled to 70 per cent of the incentive stated in the certificate.

3.41 If the Housing Secretary issues an amended certificate, references to an NRAS certificate will be treated as a reference to an amended NRAS certificate. In practice, this will mean that once an amended certificate is issued it takes the place of the original certificate. [ Schedule 3, item 2, section 380-32 ]

Example 3.42: Calculating the amount of the tax offset

HP is a member of an NRAS consortium who is entitled to an NRAS tax offset. HP derives $12,000 of NRAS rent from the NRAS dwelling for the 2010-11 NRAS year. $12,000 is the total amount of NRAS rent derived from the NRAS dwelling for the 2010-11 NRAS year and therefore HP is the only entity deriving NRAS rent from the NRAS dwelling in the 2010-11 NRAS year.

The certificate issued in relation to the NRAS dwelling indicates an incentive of $6,000 for the NRAS dwelling for the 2010-11 NRAS year.

HP will be entitled to a tax offset of $6,000 (6,000 * (12,000/12,000)).

3.42 In cases where the NRAS certificate represents only part of the NRAS year and as such the incentive amount in the certificate has been apportioned for that period, members must work out their entitlement based on that period to which the certificate relates. [ Schedule 3, item 1, subsection 380-10(3 )]

3.43 Under the NRAS, approved participants that are endorsed charitable institutions will receive the NRAS incentive as a payment unless they elect to receive the incentive as a tax offset. Certificates are only issued for the purposes of the tax offset.

3.44 In certain situations where the approved participant has changed their status throughout the NRAS year (for example, from an endorsed charitable institution to another eligible approved participant), the Housing Secretary may make a payment for NRAS dwellings in relation to part of the NRAS year and also issue a certificate for the NRAS dwellings in relation to the other part of the NRAS year. (The provisions that determine the situation where this may occur are outlined in Regulation 29 of the National Rental Affordability Scheme Regulations 2008 .)

3.45 In cases where a certificate is issued, in addition to a direct payment for the NRAS dwelling being made by the DSEWPaC, members must work out their entitlement to the tax offset amount listed in the certificate with reference to the time period covered by the certificate.

Example 3.43: Calculating the amount of the tax offset - certificate covering part of the NRAS year

HP is a member, but not the approved participant, of an NRAS consortium who is entitled to an NRAS tax offset. HP derives $12,000 of NRAS rent from the NRAS dwelling for the 2010-11 NRAS year. $12,000 is the total amount of NRAS rent derived from the NRAS dwelling for the 2010-11 NRAS year and therefore HP is the only entity deriving NRAS rent from the NRAS dwelling in the 2010-11 NRAS year.

During the NRAS year the approved participant changes and as a result a direct payment and an NRAS certificate is issued in relation to the NRAS dwelling. The certificate issued in relation to the NRAS dwelling indicates an incentive of $2,000 for the NRAS dwelling (the certificate covers four months of the year). An additional $4,000 is paid directly to the approved participant.

The amount of NRAS rent derived by HP over the four-month period to which the certificate relates equals $4,000.

HP will be entitled to a tax offset of $ 2 , 000 (2,000 * (4,000/4,000)) and will receive the $4,000 incentive paid directly to the approved participant.

Regardless of whether the approved participant changes throughout the NRAS year, HP will be entitled to the full incentive related to the NRAS dwelling. This is because HP is the only entity deriving NRAS rent from the NRAS dwelling for the full NRAS year.

Special rules for partnerships and trustees that are members but not the approved participant

3.46 If the member of the NRAS consortium is a partnership or a trustee of a trust (and the member is not the approved participant) and the following conditions are satisfied:

•

a certificate has been issued in relation to an NRAS year to the approved participant;

•

the NRAS certificate covers one or more NRAS dwellings; and

•

the member has derived NRAS rent during the NRAS year from any of the NRAS dwellings,

then it must be assumed for sections 380-15 and 380-20 of the ITAA 1997 that the member (rather than the approved participant) has been issued with a certificate in relation to the NRAS year that covers the dwellings for which the member has NRAS rent. The amount stated in the certificate is the total amount that the member is eligible to receive in relation to the dwellings. [ Schedule 3, item 1, section 380-14 ]

3.47 NRAS rent may flow indirectly to entities via a partnership or a trust. Entities that receive the NRAS rent indirectly are entitled to an offset if certain conditions are satisfied.

3.48 An entity is entitled to a tax offset for an income year (offset year) if:

•

a certificate has been issued in relation to an NRAS year to the partnership or trustee of the trust;

•

the NRAS certificate covers one or more NRAS dwellings;

•

the offset year for the partnership or trustee begins in the NRAS year;

•

NRAS rent derived from any of the NRAS dwellings during the NRAS year flows indirectly to the entity in any income year; and

•

the entity is one of the following: an individual; a corporate tax entity when the NRAS rent flows indirectly to it; the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's net income under the Income Tax Assessment Act 1936 ; the trustee of an First Home Savers Account; a superannuation fund; an approved deposit fund; or a pooled superannuation trust.

[ Schedule 3, item 1, subsection 380-15 ] Amount of the tax offset

3.49 The entity to which the NRAS rent flows indirectly via a partnership or a trust is entitled to a tax offset equal to the portion of the total amount stated for each NRAS dwelling in the certificate which is equal to the portion of the entity's share of total NRAS rent for the NRAS dwelling during the NRAS year. [ Schedule 3, item 1, subsection 380-15(2 )]

3.50 In cases where the NRAS certificate represents only part of the NRAS year and as such the incentive amount in the certificate has been apportioned for that period, entities will also work out their entitlement based on that period to which the certificate relates. [ Schedule 3, item 1, subsection 380-15(3 )]

3.51 Minor amendments have been made to ensure the structure of provisions is consistent. [ Schedule 3, item 1, sections 380-5 and 380-20 ]

Election to allow investors not deriving NRAS rent to receive the tax offset

Approved participants who are individuals, corporate tax entities or a superannuation fund

3.52 Given that the eligibility to the tax offset is triggered by deriving NRAS rent, this election provides the approved participant deriving NRAS rent with a mechanism to transfer the tax offset to the ultimate investor where the structures adopted result in the investor deriving rent that cannot be characterised as NRAS rent.

3.53 As discussed in paragraph 3.34, NRAS consortiums may be structured in many ways. In the case where a head lease (between the investor and the manager) and a sublease (between the manager and the eligible tenant) exists, the manager of the rental dwellings will be the entity deriving NRAS rent and will therefore be entitled to the tax offset.

3.54 In these cases, the NRAS approved participant of an NRAS consortium may make an irrevocable election to ensure that a member of the NRAS consortium is entitled to a portion of the tax offset that the NRAS approved participant would otherwise be entitled equal to the member's rent portion of the total rent. [ Schedule 3, item 4, subsections 380-11(1 ) and ( 4 ) and 380-12(1 ) and ( 2 )]

3.55 The member's rent would be the rent derived by the member (indirectly) from the NRAS dwelling during the income year and the total rent would be the rent derived from the NRAS dwelling during the NRAS year. [ Schedule 3, item 4, section 380-12 ]

3.56 In practice, the member may have an agreed practice with the approved participant where the approved participant takes fees out of the NRAS rent it derives before passing on the ordinary rent to the member.

3.57 The definition of 'members rent' is the rent derived by the member from the NRAS dwelling and as such will consist of the actual amount passed on to the member plus any amounts taken out by the approved participant by virtue of any additional agreements between the parties, if that amount taken out would be included in the assessable income of the member.

3.58 If the NRAS dwelling was only eligible for the NRAS offset for part of the income year, then the member's rent or total rent relates to that part of the year that the NRAS dwelling was eligible to receive the NRAS offset. [ Schedule 3, item 4, subsection 380-12(4 )]

3.59 In essence, the election will pass the entitlement from the approved participant on to the member deriving the ordinary rent indirectly from the NRAS dwelling. As such, the approved participant's tax offset entitlement under the standard provisions (section 380-10) will be reduced by the same amount as the amount passed on to the member via the election. [ Schedule 3, item 4, subsection 380-12(3 )]

3.60 Disregard from total rent any rent derived by an approved participant which is then passed on to another member by virtue of contractual arrangements that establish the NRAS consortium. [ Schedule 3, item 4, subsection 380-12(5 )]

3.61 Any NRAS rent retained by the approved participant as management fees or commission will be treated as being passed on to the other member. [ Schedule 3, item 4, subsection 380-12(6 )]

3.62 Amendments ensure that the election links into the flow-through provisions which apply when the tax offset is 'transferred' to a trustee or partnership. [ Schedule 3, item 4, section 380-13 ]

Approved participants who are partnerships or trustees

3.63 Approved participants who are partnerships and trustees of trusts can also make an irrevocable election to have an entitlement to a tax offset (by virtue of NRAS rent derived by the approved participant flowing indirectly to an entity in an income year) transferred to another member deriving rent from the NRAS dwelling during the NRAS year. [ Schedule 3, item 6, section 380-16 ]

3.64 If the entity to which the entitlement to the tax offset is transferred is an individual, a corporate tax entity or a superannuation fund, then the amount of the tax offset to which the entity is entitled will be the portion of the total tax offsets equal to the member's rent portion of total rent. [ Schedule 3, item 6, section 380-17 ]

3.65 Member's rent and total rent have the same meaning as in paragraph 3.55. [ Schedule 3, item 6, subsection 380-17(2 )]

3.66 Again, disregard from the total rent any rent derived by an approved participant which is then passed on to another member by virtue of a contractual arrangement that established the NRAS consortium. [ Schedule 3, item 6, subsection 380-16(5 )]

3.67 Any NRAS rent retained by the approved participant as management fees or commission will be treated as being passed on to the other member. [ Schedule 3, item 6, subsection 380-16(6 )]

3.68 Total tax offset means the total of offsets to which entities would be entitled because the NRAS rent derived from the NRAS dwelling covered by the certificate flows indirectly to them from the approved participant. [ Schedule 3, item 6, subsection 380-16(2 )]

3.69 The tax offset to which an entity to which NRAS rent derived from the NRAS dwelling flows indirectly is reduced because of the election. The offset is reduced by the proportion of the tax offset entitlement transferred that equals the proportion of the entities original tax offset to the total tax offsets. [ Schedule 3, item 6, subsection 380-16(2 )]

3.70 These amendments ensure that the election by a partnership or trustee approved participant links into the flow-through provisions in sections 380-15 and 380-20 to 380-30 where the tax offset is 'transferred' to a another trustee or partnership. [ Schedule 3, item 6, section 380-18 ]

Requirements for elections

3.71 The election must be made in the approved form and within 30 days after the day the Housing Secretary issues the certificate to the NRAS approved participant. [ Schedule 3, item 4, subsections 380-11(2 ) and 380-16(2 )]

3.72 If an amended certificate is issued by the Housing Secretary, the election will be required to be made within 30 days after the amended certificate is issued. [ Schedule 3, item 2, section 380-32 ]

3.73 The Commissioner may require that a copy of the election be given to the Commissioner and/or to each member of the NRAS consortium who may be entitled to a tax offset as a result of the election being made. [ Schedule 3, item 4, subsections 380-11(3 ) and 380-16(3 )]

3.74 Allowing the Commissioner to require that a copy of the election be given to members aids in the administration of the NRAS and will provide notification/assistance to those members entitled to the NRAS offset by virtue of the election being made.

3.75 The Commissioner may choose not to require a copy of the election to be provided and may instead require that approved participants simply make an election and retain that election until an audit is performed when the election will need to be evidenced.

Example 3.44

An NRAS consortium is established that includes the dwelling owners and the manager of the consortium. The approved participant of the consortium is the manager. The manager applies to the Housing Secretary to participate in the NRAS and represents the parties to the consortium.

The dwelling owners enter into a head lease with the manager of the consortium. The manager of the consortium then enters into a sublease with NRAS eligible tenants (being low to moderate income households).

Under this arrangement, it is the manager (approved participant) of the NRAS consortium that derives NRAS rent from the eligible tenants under the sublease. The dwelling owners derive ordinary rent (not NRAS rent) from the manager under the head lease.

These facts are identical to those addressed by ATO ID 2009/146 (with the references to 'non-entity joint venture' replaced by 'NRAS consortium').

Following the completion of the NRAS year, the Housing Secretary issues the manager representing the consortium with a certificate in relation to the rental dwelling.

If an election is not made, the manager would be entitled to a tax offset, as the manager is the entity deriving NRAS rent. The dwelling owners, having not derived any NRAS rent, would not be entitled to a tax offset. This is not NRAS rent for the reasons given in ATO ID 2009/146.

Alternatively, the parties to the consortium may have predicated their participation in the NRAS on the basis that the NRAS incentive would be enjoyed by the dwelling owners, rather than the manager. To achieve this outcome, following receipt of the certificate from the Housing Secretary, the manager may elect to relinquish its entitlement to a tax offset for the income year corresponding to the NRAS year covered by the certificate. The manager is eligible to make this election because it is entitled to a tax offset under section 380-10 of the ITAA 1997 and it is the approved participant in relation to the NRAS consortium.

If the manager makes the election, each party's entitlement to the NRAS tax offset for a dwelling would be in proportion to their share of the ordinary rent derived in relation to that dwelling, for the time in the NRAS year covered by the certificate in which the dwelling was eligible for the NRAS incentive. In this example, the ordinary rent derived from a rental dwelling means the rent derived by a dwelling owner under the head lease (that is, the rent derived by the dwelling owner from the manager of the consortium). Although this is not NRAS rent, it is rent ultimately sourced from the NRAS rent derived by the manager.

In this example, the dwelling owners are the ultimate recipients of all of the rent in respect of the property, under the head lease. Each dwelling owner therefore would be entitled to a portion of the tax offset but only if the election is made. The manager, having made the election, and not being the ultimate recipient of any rent in respect of the dwelling, is no longer entitled to any tax offset.

Payments made by states and territories

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 ]

3.78 Likewise, a capital gain or capital loss made from a CGT event relating directly to anything of economic value provided directly or indirectly by a state or territory government in relation to the participation in the NRAS is disregarded. [ Schedule 3, item 9, paragraph 118-37(1 )( j )]

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.

Application and transitional provisions

3.79 Item 10, which amends the treatment of state and territory payments, applies to the 2008-09 income year and later income years. [ Schedule 3, item 11 ]

3.80 The following items will apply retrospectively for the benefit of affected taxpayers.

3.81 Item 1, which introduces the concept of an NRAS consortium and recognises that certificates are issued to the approved participant of the consortiums rather than to the consortiums directly, applies to the 2009-10 income year and later income years. [ Schedule 3, item 3 ]

3.82 Items 4 and 6, which provide an optional election for certain taxpayers, applies to the 2010-11 income year and later income years. [ Schedule 3, item 7 ]

3.83 An election in relation to an NRAS certificate may be made within 30 days after the day the amendment receives Royal Assent, if the Housing Secretary has already issued the NRAS certificate for the NRAS year 2010-11 before that date. [ Schedule 3, item 8 ]

Consequential amendments

3.84 There are consequential amendments made as a consequence of the technical amendments. The consequential amendments also clarify the meaning of the terms connected to the NRAS. [ Schedule 3, items 5, 12, 13 and 15 ]