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NRAS Explained

On Thursday 24 July 2008, the Treasurer the Hon Wayne Swan MP and the Minister for Housing the Hon Tanya Plibersek MP, launched the National Rental Affordability Scheme (NRAS) and announced the first Call for Applications.
The implementation of the National Rental Affordability Scheme delivers on a 2007 Federal Election Commitment.
The National Rental Affordability Scheme will help increase the supply of affordable rental dwellings by up to 50 000 by 2016. Rent for these properties will be charged at 20 per cent below the market rate for eligible tenants.
Governments, the business sector and community organisations recognise that housing affordability is now an issue of significant community concern. The growing cost of housing is having a serious impact on the ability of many Australians to meet their financial commitments.
The Australian Government is providing Incentives to:
•    increase the supply of affordable rental dwellings;
•    reduce rental costs for low to moderate income households;
•    encourage large scale investment and innovative delivery of affordable housing; and
•    stimulate the construction industry at a time of economic downturn.
The National Rental Affordability Scheme offers annual Incentives for ten years. The two key elements are:
•    A Commonwealth Government Incentive of $6 000 per dwelling per year as a refundable tax offset or payment; and
•    A State or Territory Government Incentive of $2 000 per dwelling per year in direct or in kind financial support.
•    Both the Federal and State Incentive is indexed annually on May 1st to the Rent component of CPI (average for 8 capital cities). The combined Incentive payment is currently $9,981 (NRAS 2012/13).
The Incentive will be provided annually on the condition that the dwelling is rented to eligible low and moderate income households at 20% discount to market rent rate.
The National Rental Affordability Scheme is designed to pool significant resources from a range of participants including financial institutions, non-profit organisations and Local Government which, when combined with the Incentives from the National Rental Affordability Scheme, will increase the supply of lower-rent housing. The tenant eligibility criteria will ensure the National Rental Affordability Scheme is open to families on low and moderate incomes, individuals who are looking to rent a property for the first time, and singles in private or public rental accommodation, including people working or undertaking study or training.

What is an NRAS Approved Property?

 >Approved to receive the NRAS incentives for up to 10 years.
 >A property must be leased at a discount at least 20% below the market rent.
 >A property can only be tenanted by an eligible tenant/s.
 >An annual Statement of Compliance must be submitted.
 >Use of specialist housing and tenancy managers is needed to ensure compliance with NRAS - these are referred to as approved consortiums.

Why do I have to use an NRAS approved consortium?

As the NRAS incentives can only be allocated to an NRAS Approved Participant, your participation must be with an approved consortium.
A consortium is the managing body that has the NRAS rights for the property.

Why am I entitled to receive the incentives?

By purchasing an NRAS Approved Property you agree to rent your property at a reduced market rent rate of at least 20% to an eligible tenant.
How much are the incentives?

The previous and current NRAS year incentives are:
 >2010/2011 - $9,410
 >2011/2012 - $9,524
 >2012/2013 - $9,981 (Current Year)

This will change on the 1st of May each year in line with the CPI rental component increase.

How are the incentives paid?

Tax incentives are paid at two different times in different amounts. The NRAS year runs from 1 May to 30 April. Your consortium is required to lodge the annual compliance report for your property in May of each year.
The Federal Government incentive is a Refundable Tax Offset (RTO), which will be advised to your consortium around July each year. You will receive a tax certificate from your consortium to submit with your annual tax return to the Australian Taxation Office (ATO).
You will need to include this amount in your annual tax return, with the RTO either reducing your tax liability or a cash refund. This makes up 75% of the total NRAS incentive. Currently this is valued at $7,486.
An RTO differs from most tax offsets. 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. RTOs however can reduce the amount of tax you are liable to pay to an amount less than zero, which results in a refundable amount as cash.
The State/Territory Government Incentive will be made in the form of a tax-free cash payment and is usually paid around September of each year. The Cash component will be paid by direct deposit into your nominated bank account. This makes up 25% of the NRAS incentive.
Currently this is valued at $2,495.
The incentives are pro-rated for the amount of time the NRAS scheme has been activated according to the NRAS year, then paid out in yearly amounts following this with any shortfall in the first year being apportioned to the final year. Therefore your NRAS property incentive may run over 11 NRAS years but will only be 10 years in full.

How is the Market Rent Rate determined?
The market rent is determined by an Independent Valuation, which is conducted on behalf of and generally payable by the owner of the property.

Under the scheme the market rent will be determined once a year by either of the following:

 >Independent Valuation: Typically (varies between consortiums) in years 1, 4 and 7.
 >Inflation (CPI): At the start of years 2, 3, 5, 6, 8, 9 and 10 it will be determined by the rental growth in the location of the property.

Who can rent my NRAS Approved Property?

Tenants for the properties are required to meet the NRAS Income Eligibility Limits, which are reviewed and updated annually in line with the NRAS year.
What are the Income Eligibility Limits for a Tenant?

For the NRAS Year 2012/2013:

One adult   $45,496  $55,870
Two adults $62,899 $78,624
Three adults $80,302 $100,378
Four adults $97,705 $122,132
Sole parent with one child  $62,943   $78,679
Sole parent with two children $78,033 $97,542
Sole parent with three children $93,123  $116,404
Couple with one child $77,989  $97,487
Couple with two children $93,097 $116,349
Couple with three children $108,169  $135,212

To maintain eligibility as a tenant their income can increase above the Initial Income by 25 per cent. A tenant ceases to be eligible when income exceeds the upper income limit in two consecutive years. (These limits are indexed annually on 1 May in accordance with the NRAS tenant income index.)
NOTE: The Annual Initial Income is the starting threshold (i.e. a tenant is NOT eligible for NRAS if they exceed this threshold)

Do I have a say over who the tenants are?

Yes, as the owner of the property standard tenancy laws apply. The property is managed essentially the same way a normal rental property would be. The Tenancy Manager is able to supply the owner with information on the eligible tenant and providing the tenant meets the eligibility criteria you have the final say.

What does the Property Manager do?

The Property Manager is responsible for liaising between you and the Tenancy Manager. They ensure the Approved NRAS Property is maintained to comply and the normal property management duties are carried out including maintenance and repairs.

Can I manage the property myself?

No. Due to the NRAS compliance requirements, The Department of Sustainability, Environment, Water, Population and Communities (SEWPaC) encourages the use of specialist housing and tenancy managers.
What fees do the consortiums charge in relation to receiving NRAS incentives?
Fees you will incur will vary between consortiums, the table below outlines the fees and some estimated fee amounts:

One-off Establishment, Cancellation and Non-Compliance Fees A percentage of the annual incentive amount (typically 5-9%) OR a percentage of the rental return (typically 8%-13%)
An establishment fee may apply Investors will be invoiced the Annual Fee by their consortium, and this is payable by the investor prior to the release of any NRAS incentives.

Cancellation fees vary between consortiums (check the PDS for further details)

What other cost can I expect to pay for my NRAS Approved Property?

When you purchase the property you will incur the normal costs associated with owning an investment property, such as interest, insurance, rates, body corporate or strata levies, and maintenance.
Tenancy letting and ongoing property management fees for an NRAS Property are higher than standard residential investment properties due to the level of compliance and tenancy eligibility checks, which will vary from state to state. Property and Tenancy management fees will be in the range of 10% plus GST of the Market Rent (i.e. 12.5% plus GST of the Gross NRAS Rent).

Can I sell my NRAS Approved Property?

Yes you can sell your property at any time. The purchaser will be able to participate in NRAS if they wish. The NRAS Incentive, for the year in which the property has more than one owner, is shared in the same proportions that each owner shared the rent for the year.
An Owner can remove the property from NRAS and the incentives will not be paid for the NRAS year in which the removal occurred (i.e. this would occur if the property is sold to an owner occupier).

Do I own the property I am purchasing?

Yes, when you purchase the Approved NRAS Property you will own it.
You generally acquire under a normal offer and acceptance (or sale contract), and will also be required to participate and enter into the specific consortium so you can receive the incentives.

Under what circumstances will my NRAS incentive be cancelled?

National Rental Incentives may be apportioned, withheld, offset or withdrawn in the event of failure to comply with requirements under the Scheme, for example where:

>The tenancy arrangements in respect of an approved rental dwelling infringe on State or Territory Government regulatory requirements;
>The approved participant rents the approved rental dwelling to an ineligible tenant;
>An approved rental dwelling is vacant for more than 13 weeks in an NRAS year (cumulatively) or more than 13 weeks continuously;
>An approved rental dwelling is not rented at least 20 per cent below current market rates for equivalent dwellings; or
>Any special conditions on the approved rental dwelling aren’t met.

Can I use an Income Tax Withholding Variation with NRAS?

The Income Tax Withholding Variation (ITWV) is simply an estimate of the tax you would be paying.
As the NRAS incentive amount is clearly defined this can be calculated for the purposes of an ITWV.
If a difference were to exist at the end of the financial year between your estimate and the actual taxation amount, this would be adjusted accordingly.
BMFS Consultants are not specialist accountants and we recommend that you speak with a taxation expert or accountant before you make any decisions on this matter.

What if my property is purchased in a tax entity or super fund?

Entities are entitled to claim RTOs provided they meet the NRAS criteria outlined (i.e. the consortium has been issued with a certificate and the income year begins in the NRAS year to which the certificate relates).
NRAS is an exciting new investment opportunity for astute investors, providing impressive cash flow benefits. It recognises that governments have a role in creating and encouraging new markets.
The Australian Government has made a 10 year financial commitment to NRAS which gained bipartisan support. NRAS dwellings are private property; no Government has caveats or claims over NRAS properties, and they can be sold without penalty.

It should however be treated as a bonus and NOT a reason to invest. The fundamental drivers for investment should all exist regardless of NRAS.

This information is to be used as a guideline only. For the complete requirements please refer to The Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) website.
For more information or to see if an NRAS proeprties is suitbale for your investment portfolio, contact your investment specialist at Better Mortgage & Financial Services, today!