ATO Interpretative Decision

ATO ID 2009/146

Income Tax

• Note: This ATO ID contains a view in respect of section 380-10 of the Income Tax Assessment Act 1997 as it operated prior to amendments introduced by the Tax Law Amendment (2011 Measures No. 5) Act 2011. It was amended by Act No 62 of 2011 which introduced the concepts of an NRAS consortium, applicable to NRAS rent derived during the 2009-10 NRAS year or later NRAS years.
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Issue

Does a dwelling owner who leases their dwelling to an entity have an entitlement to the NRAS tax offset under section 380-10 of the Income Tax Assessment Act (ITAA 1997) (applicable to non-entity joint ventures) if the entity subleases the dwelling?

Decision

No. The Commissioner considers that the dwelling owner does not have an entitlement to the NRAS tax offset as the dwelling owner does not derive NRAS rent.

Facts

A non-entity joint venture (NEJV) is established that includes at least two parties, the dwelling owner and the manager of the NEJV.

The manager of the NEJV applies to the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) to participate in the NRAS and effectively represents the parties to the NEJV.

The manager of the NEJV is the approved participant and receives the NRAS allocation in respect of the rental dwelling.

The dwelling owner enters into a head lease with the manager of the NEJV and receives rent from the manager of the NEJV under the head lease.

The manager of the NEJV then enters into a sublease with NRAS eligible tenants (being low to moderate income households) and the manager of the NEJV receives rent from the eligible tenants under the sublease.

Reasons for Decision

To be able to claim the NRAS tax offset, a party to an NEJV needs to:

•

be entitled to claim the NRAS tax offset by meeting the criteria outlined in subsection 380-10(1) of the ITAA 1997, which includes having NRAS rent covered by subsection 380-10(3) of the ITAA 1997 (the entitlement provisions), and

•

have an amount of NRAS tax offset to claim as outlined in subsection 380-10(2) of the ITAA 1997, which is the sum of all amounts worked out under subsection 380-10(4) of the ITAA 1997 (the calculation provisions).

The Commissioner is of the view that in the context in which the expression 'has' is used in paragraph 380-10(1)(a) of the ITAA 1997, it means 'has derived'. This is because the other relevant provisions, namely subsections 380-10(3) and 380-10(4) of the ITAA 1997, operate on the basis of NRAS rent being 'derived' by an entity. Also, paragraph 1.14 of the Explanatory Memorandum to the Bill (National Rental Affordability Scheme (Consequential Amendments) Bill 2008) introducing the relevant provisions strongly supports this view. Note that if this view is incorrect and 'has' is to be given a broader meaning than 'derive', then the use of 'derive' in the calculation provision of subsection 380-10(4) of the ITAA 1997 will nevertheless ensure that the amount of NRAS tax offset for anyone who does not derive NRAS rent will be nil.

What is NRAS rent ?

NRAS rent is defined in subsection 995-1(1) of the ITAA 1997 as, 'rent derived from a rental dwelling under the National Rental Affordability Scheme for an income year'.

To analyse what is NRAS rent, the definition can be broken into the following elements:

•

rent derived

•

from a rental dwelling

•

under the NRAS

Based on the established principles of derivation, the Commissioner is satisfied that in the arrangement outlined above, both the dwelling owner and the manager of the NEJV derive rent. The dwelling owner derives rent under the head lease and the manager of the NEJV derives rent under the sublease. That is, both the dwelling owner and the manager of the NEJV derive rent which is sufficient to satisfy the first element of the definition of NRAS rent.

To satisfy the second element, NRAS rent must be derived 'from a rental dwelling'. In both the head lease and sublease the source of the rent derived is the rental dwelling because it is the consideration for the lease over that dwelling. Therefore it seems clear that the NRAS rent is derived 'from a rental dwelling'.

The third element of the definition is the most important one for present purposes, namely that the rent is derived 'under the NRAS'. To determine whether rent is derived 'under' the NRAS it is necessary to consider what the NRAS is.

What is the NRAS ?

The NRAS is defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning as in the National Rental Affordability Scheme Act 2008 (NRAS Act). Therefore in determining if the NRAS rent is derived 'under' the NRAS, it is necessary to have regard to the meaning of the NRAS under the NRAS Act.

NRAS is defined in section 4 of the NRAS Act as the scheme prescribed for the purposes of section 5. Section 5 of the NRAS Act states:

Making the National Rental Affordability Scheme

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.

As section 5 refers to the 'objects of this Act', the object section of the NRAS Act is of further assistance for the purpose of interpreting 'under the NRAS'. Section 3 of the NRAS Act states:

Object

The object of this Act is to encourage large-scale investment in housing by offering an incentive to participants in the National Rental Affordability Scheme so as to:

(a)

increase the supply of affordable rental dwellings; and

(b)

reduce rental costs for low and moderate income households.

The meaning of 'under the NRAS' needs to be considered with reference to the definition of the NRAS as constructed by sections 3, 4 and 5 of the NRAS Act. Taking into account these provisions, the Commissioner is of the view that the key elements of the NRAS include approved participants, approved rental dwellings, the process by which the Secretary of Housing approves them and the provision of incentives to approved participants. These key elements need to be considered in the context of the object of the scheme to increase the supply of affordable housing and reduce rental costs of low-moderate income earners.

The facts of the outlined arrangement need to be considered to determine whether the rent derived 'under' the NRAS is:

•

the rent derived by the manager of the NEJV under the sublease

•

the rent derived by the dwelling owner under the head lease, or

•

both the rent derived by the manager of the NEJV and the rent derived by the dwelling owner.

Is the rent derived by the manager of the NEJV under the NRAS ?

First, consider the involvement of the manager of the NEJV. The manager of the NEJV is the approved participant. The manager of the NEJV applies to be part of the NRAS. The manager of the NEJV receives the NRAS allocation in respect of the approved rental dwellings. The manager of the NEJV is responsible for lodging the statement of compliance under the NRAS. The manager of the NEJV is the legal entity which FaHCSIA deals with under the NRAS, and importantly, the manager of the NEJV under the sublease directly enters into a legal relationship with the tenants and provides the approved rental dwelling to a low-moderate income household to reduce their rental costs. Furthermore, the manager of the NEJV is the entity that is provided with a certificate (for all intents and purposes, the incentive referred to in paragraph 5(c) of the NRAS Act) in the name of the NEJV in accordance with regulation 29 of the National Rental Affordability Scheme Regulations 2008.

Considering the extent to which the manager of the NEJV participates in the key elements of the NRAS, the Commissioner is of the view that the rent derived by the manager of the NEJV under the sublease is clearly rent derived under the NRAS. That is, the rent derived by the manager of the NEJV under the sublease is correctly characterised as 'rent derived from a rental dwelling under the NRAS'.

Is the rent derived by the dwelling owner under the NRAS ?

Now, consider the involvement of the dwelling owner. The dwelling owner is not the approved participant under the NRAS. FaHCSIA do not associate the dwelling owner with an approved rental dwelling under the NRAS. That is, FaHCSIA do not have knowledge of the dwelling owner or their connection with a particular approved rental dwelling under the NRAS and do not have any dealings with them. Importantly, nor does a dwelling owner directly provide the approved rental dwelling to a low-moderate income household to reduce their rental costs or enter into a legal relationship with those tenants. Rather the dwelling owner enters into a legal relationship with the manager of the NEJV only, and provides the rental dwelling to the manager of the NEJV only.

The question is whether the dwelling owner also derives rent 'under' the NRAS. The Commissioner is of the view that, because none of the dealings by the dwelling owner is specifically recognised by the NRAS Act and, in particular, the lack of a direct connection between the dwelling owner and the NRAS eligible tenant, the rent paid under the head lease is not derived under the NRAS.

Amendment History

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1997
   Division 380
   subsection 995-1(1)

Keywords
Derived
Rebates and offsets
Rental property

Siebel/TDMS Reference Number:  1-1SX6B4O; 1-5UHK0VP; 1-CHCKNFX

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 December 2009
Date reviewed:  23 October 2017

ISSN: 1445-2782