Guide On NRAS Property for SMSF's

A more popular arrangement of buying property with super has emerged in recent times and with the introduction of the tax offsets provided by the National Rental Affordability Scheme (NRAS) the government has made it very attractive for investors. Under the incentive a SMSF could be entitled to a Refundable Tax Offset of over $10,000 per annum for 10 years.

What is a refundable tax offset?

According to the ATO “most tax offsets can only reduce the amount of tax you pay to zero - that is, if your tax offsets are greater than the amount of tax you are liable to pay, you do not get a refund of the excess amount“.

An exception to the above rule is a refundable tax offset. These offsets can reduce the amount of tax payable by an amount that is less than Nil, this results in an amount payable known as the “refundable amount”.  The NRAS tax incentive is a refundable tax offset, so think of it like a franked dividend that provides a tax rebate but on a much larger scale.

What is NRAS?

Since 2008 the Government set it sights on catering for the lack of affordable rental housing by providing a large financial incentive to investors to build and rent properties to households on low to moderate incomes at a 20% discount to the market rate. The term of the scheme runs for 10 years per property.

According the FAHCSIA website some of the eligibility criteria are as follows:

  • The house of unit must be brand new - so it must not have been tenanted previously in its current condition.
  • The home must be rented at a rate that is at least 20 per cent below the current market rate.
  • An NRAS propetry must demonstrate that a tenant, or tenants, would be able to live independently within the residence and not need to access external or common facilities.An eligible property does not include a mobile home, houseboat or caravan.
  • The tenants of eligible properties must meet the income thresholds as set out by the scheme.

Source: The Department of Families, Housing, Community Services and Indigenous Affairs

There are many groups available in the market place that can assist in helping SMSF’s find properties and get them NRAS approved which can make the process easier. Caution should be taken and due diligence done to ensure you make an informed decision.

SMSF trustees can also purchase NRAS properties that qualify for the tax and cash incentives as long as they meet the conditions of being rented to low to moderate income families at a 20% rental discount.

The current income-tax free Incentive is $10,350 this is indexed annually so it will increase each year. The amount is paid annually to the property owner as per each NRAS approved/complying dwelling they own.

For the 2013/2014 year, the incentive is has the following components:

  • An Australian Government contribution of $7,763 per dwelling per year for paid as a refundable tax offset or payment over 10 years; and
  • State or Territory Government contribution of $2,587 per property per year as a direct payment or in the form of financial support, such as reduced stamp duty, land taxes or infrastructure charges, also payable over 10 years.

Other tax incentives such as depreciation are additional to this, so the overall benefit could be greater than the just the NRAS refundable tax offset.

What is the difference between NRAS and social housing provided by the government?

The main difference here is that NRAS tenants are able to earn up to higher levels of income as high as $136,580 per year depending on their family size, where social housing tenants can only earn up to around $65,312 per annum. 

In terms of tenants, the NRAS seems to be aimed at workers who are in the services industry such as policemen and nurses with families.  Tenant selection is very similar to any other agency agreement. The tenant must go through a proper interview and application process before being approved as a potential tenant for your property.

Also the rental rate will be set by the market rent and valued by an independent valuer for NRAS approval. One thing to be mindful is that that the cost of managing these properties can be slightly higher than the standard market rate, so expect to pay a little more for managing the property.

So how does it work in a self managed super fund?

To look at the benefits of NRAS for SMSF’s here is a scenario to demonstrate it further:

Case study example:

John and Carol live in Sydney are married and both are working full time, one as a Doctor and the other as an IT Professional. Both are aged 50 and trustees/memberd of the JC Sydney Super Fund. 

They have decided to purchase a NRAS approved property for $400,000 as a part of their super fund investment strategy. Assume they each intend to make concessional contributions of $20,000 per annum into their super fund. 

Main assumptions:

They find a suitable NRAS property for $400,000. The typical market rent is appraised to be $400 per week. The NRAS Reduced rent will be 20% less or $320 per week.

Also what would happen if they had a limited recourse loan of $280,000 (70% of the property value) with a 6% interest rate , how would this impact the cash flows?

The table below shows the cash flow effect to the JC Sydney SMSF:

Table 1-1:

JC Sydney SMSF

Standard Property

NRAS Property

NRAS Property with a loan

Rent per year

20,800

16,640

16,640

Concessional contributions

40,000

40,000

40,000

Total income

60,800

56,640

56,640

Less deductions: Interest costs

0                            

0

16,800

Taxable Income

60,800

56,640

39,840

Tax Payable @15%

9,120

8,496

5,976

Less the NRAS refundable tax offset

0

10,350

10,350

Tax rate of fund

15%

0%

0%

Excess tax credits *

 

1,854

4,374

Note: The above calculation excludes depreciation allowances and other ancillary costs in managing property and is for illustration purposes only. Cash flows are based on post construction of the property for a full 12 months.

Excess Credits: As per the table above the funds excess credits could be used to offset other income in the fund such as interest income, share dividends and concessional contributions. This excess amount is not lost,  it is paid as cash payment from the ATO.

E.g. If the fund has an unused tax credit of $4,374;  it could have up to another $29,490 of assessable income such as concessional contributions without paying tax.

Updated:  It may be worth noting that according to the ATO website as of the 1st of July 2013 if you are 59 years old or more on 30 June 2013, you can make additional concessional contributions to your super fund of up to $35,000 increasing from $25,000.

Also as of 1 July 2014, the higher concessional contribution cap of $35,000 will also apply if you are 50 years or over.

The 10 year NRAS benefit

For a complying super fund the NRAS tax offset would provide over $69,000 of tax-free income each year assuming the super fund tax rate remains at 15%.  Also since this is indexed each year the benefit over 10 years could be well over $690,000 towards tax free savings for the super fund. In other words a total of just over $100,000 of tax free government incentives are applicable over those 10 years.

The normal capital gains provisions would apply as per superannuation tax. So if the property was sold after 12 months the nominal rate of 10% capital gains would apply or 15% if sold before this. However in pension phase the sales of the property should be exempt from capital gains tax.

From speaking to a number of professionals in the industry some of the main issues with these kinds of properties have been lower LVR’s (70% or below), the demographics may not be ideal for some investors and also the reseller market may only be to investors for the first 10 years if the NRAS scheme is to be maintained.

Greater detail about the scheme can be found here 

Continue to How much does it cost to run a SMSF? >>

 

For more on SMSF's go to our Comprehensive Guide To SMSFs >>

 

Disclaimer: The information on this site is general in nature and not financial advice. Visitors should consider obtaining independent advice before making any financial decisions.

 

 

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