National Rental Affordability Scheme (NRAS) is an Australian Government incentive to individual Investors to help fund 50,000 Affordable dwellings costing under $600,000 for the Rental market.
NRAS Incentives improve cash flow and profitability of property investment over traditional
investment property with the same depreciation and capital growth benefits.
Purchase price of the
NRAS property does not affect the NRAS Incentive payment which is fixed, so lower value properties may represent better investment returns given similar growth factors.
Community Housing groups tender for NRAS Incentive allocations and developers provide suitable properties to satisfy the NRAS criteria that are then sold directly to NRAS Investors.
In 2013, NRAS Incentive payment is $10,350 TAX FREE ($7,763 from Federal Government via ATO and $2,587 by State Government) and increases by Housing CPI to $120,000 over 10 years.
NRAS properties are rented to approved Tenants at 20-25% less than market rentals to increase affordability and Tenants must maintain properties to required standards to retain rental savings.
Tenants can earn between $45,000 and $135,000 depending on family size and composition and have 12 months to vacate if they no longer satisfy approved NRAS status or can buy the property.
Independent NRAS Property Managers select approved Tenants and manage properties on behalf of Investors so properties can be purchased Interstate for diversification of risk with confidence.
Rents are increased annually by CPI with independent market rent reviews in years 4 and 7 and Tenants are reluctant to leave as they will have to pay higher market rents for non NRAS homes.
Major Banks now finally offer NRAS finance up to 80% but only a few Banks permit NRAS payments to be used in serviceability calculations limiting loan values available to many Investors.
To June 2012 only 8,678 NRAS properties have been allocated and a total of 31,872 reserved by Housing consortiums but NRAS Scheme will conclude by 2016 so Investors need to act soon.
NRAS properties can be sold on the open market to other Investors or alternative property found before the end of the 10 year term and the new Investor retains residual NRAS Incentives.
NRAS – How It Works
Property investments rely on leverage and Capital Gains to maximise investment values.
Select properties with good capital growth potential as Capital Gains will deliver best long term investment returns.
NRAS properties must satisfy selection criteria based on need and growth potential for approval and should be suitable investments.
NRAS – How Housing Consortiums Work
The Federal Government benefit currently is $7,763 and the State Government payment is $2,587 for a 2013/4 total payment of $10,350. The Housing Consortium and Property Manager charge fees for their service but the property is independently owned by the Investor.
SMSF Benefits by buying NRAS
The strategy is to maximise the tax-free NRAS incentive on a well maintained property with growth potential and sell the asset post retirement in pension phase when the capital gain is exempt from tax. SMSF is the beneficial owner of the NRAS property and receives all taxation and NRAS payment benefits. During NRAS, the property may have extra negative gearing benefits if financed from the reduced rental income.
SMSF must have the sole purpose of providing retirement benefits for members through its investment strategy. SMSF can buy any residential real estate as long as its members do not live in it or lease it to a related party and it is not purchased from a related party. NRAS property must be rented to NRAS approved qualified tenants at less than market rents for 10 years to obtain maximum NRAS incentive payments.
At the end of 10 years, the property earns normal market rental returns but remains an SMSF asset and provides tax free pension income to SMSF members. The residential rental market represents a good long-term investment with the opportunity for significant capital gains.
Trustees of an SMSF can invest in and buy NRAS property and receive NRAS tax-free incentives for 10 years and normal property depreciation tax benefits. Owners control tenant selection and NRAS properties are managed by independent professional estate agents.
Tenants have strong incentives to maintain the property to retain leases at less than market rates and tenant turnover is much lower than in the main rental market. Market rent reviews are carried out by independent valuers in year 4 and year 7 with annual increase each year based on Housing CPI increases.
SMSF can only have one property per Custodian Trust when financing an NRAS property with a limited recourse loan and Banks often require a Company Trustee for the Custodian Trust. A SMSF can own several NRAS properties with mortgage finance if there are separate Custodian Trusts for each property and the rental and SMSF income is sufficient to service the loans.
Property real estate traditionally provides safe long-term investment returns with little volatility. Employer superannuation contributions plus the rent and
NRAS incentive payments can pay off the mortgage and the loan is limited recourse to any other SMSF or personal assets. As an SMSF asset, the property has asset protection benefits in the event of individual bankruptcy.
A Custodian Trust “holds” ownership of the property title for legal purchases with the SMSF as “beneficial” sole and primary beneficiary. SMSF has the right (but not the obligation) to acquire real ownership by making payments after acquiring the beneficial interest. For tax and NRAS purposes the SMSF “holds” the property.
The Federal Government component of NRAS is received as a refundable tax credit when the
SMSF lodges its annual income tax return. The State Government component is a non-taxable cash payment in September each year. Both payments are not taxed and received as full benefit.
Tenants can earn income up to $125,960 per year while the maximum for Government social housing tenants is $58,292.
ATO’s new SMSFR2012/1 holds that if property acquired is a single acquirable asset the deposit and balance payable at settlement can be financed under a single limited recourse borrowing arrangement (LRBA). This is also the case for off-the-plan purchases if the contract is to purchase a single title vacant block of land along with the construction of a house as a “package” on that land before settlement occurs. The contractual arrangement is for the acquisition of land with a completed house on it and settlement occurs after the house construction is completed.
The National Rental Affordability Scheme (NRAS)