One of the key attractions for Self Managed Super Funds is the ability to acquire property, either outright, jointly (tenants in common or unit trust) or through a limited recourse borrowing arrangement.
With the Australian Government currently seeking to address the shortage of affordable rental housing, they are providing financial incentives for 10 years to build and rent dwellings to low and moderate income households at 20 per cent below-market rates.
So, what’s the connection between the two?
For trustees of a SMSF, they can invest to buy direct property and qualify for the NRAS tax and cash incentives when acquiring a qualifying new dwelling on the condition that they are rented to low and moderate income households at 20% below market rates. This incentive is indexed annually and complemented by existing taxation arrangements including depreciation. It is paid annually to participants for each approved rental dwelling which meets NRAS compliance requirements.
The incentive currently (2010/11) comprises:
- an Australian Government contribution of $6,855 per dwelling per year for 10 years as a refundable tax offset or payment (not-for-profit organisations endorsed as charities by the Australian Taxation Office will receive the contribution as a direct payment); and
- a State or Territory Government contribution of $2,285 per dwelling per year for 10 years as a direct payment or in-kind financial support, such as reduced stamp duty, land taxes or infrastructure charges.
Isn’t this basically social housing?
No, there is a difference. NRAS tenants can earn income up to $125,960 per year, as opposed to $58,292 for social housing tenants. The focus of the NRAS is for workers (service industry), over 55’s and families. There is control with tenant selection, and advertising for tenants is with any other normal tenancy arrangement. In addition, the rental rate is set by the market rent and is valued by an independent valuer for NRAS purposes.
So, is there any benefit for a SMSF to acquire a property under this scheme?
To look at the benefits of the strategy, let’s consider the following case study:
John (48) & Jane (47) Citizen are trustees and members of the Citizen Family Super Fund (SMSF). They are both making maximum concessional contributions each year into the Fund. The Trustees wish to buy a residential property as part of the Fund’s Investment Strategy.
The trustees have heard about the Australian Government initiative (NRAS) to make rental properties more affordable by encouraging large-scale investment in rental housing for low to moderate income families and individuals.
The SMSF trustees buy a NRAS approved property (via development):
- Off-the-plan, 12 months to build
- Melbourne Bay side apartment – 2 bedrooms, 2 bathrooms, 1 car
- Purchase Price – $355,000
- Market Rent – $320 per week
- NRAS Reduced Rent (80% of market) – $256 per week
How it works
|Super Fund||Rental||NRAS Scheme Rental||NRAS with Limited Recourse Loan*|
|Less: Interest deduction||$0||$0||($17,395)|
|Tax @ 15%||$10,308||$9,497||$6,888|
|Less: NRAS Tax Offset||$0||($9,140)||($9,140)|
|Effective tax rate||15%||0.56%||0.00%|
Note: Where the approved rental dwelling is first made available for rent part way through an NRAS year (1 May-30 April), a partial entitlement will be paid in both the first and the final NRAS year. Calculations do not take into consideration any building allowance or depreciation deductions.
*Assume limited recourse loan at 70% LVR of purchase price; interest rate at 7%
** Fund would have an unused tax credit of $2,252; alternatively it could have an additional $15,013 of assessable income (including concessional contributions) without paying tax.
NB. When John and Jane turn 50, they may be able to make additional concessional contributions up to $50,000 p.a.
Long term benefit
The NRAS tax offset is available for 10 years and provides $60,933 of tax-free income to a complying super fund (either taxable contributions or investment income). This tax benefit is indexed each year, providing more $610,000 of savings on taxable income (contributions and income) to the SMSF members.
There are no additional CGT concessions available for properties acquired through the NRAS. A SMSF would be subject to tax at 15%, or 10% if held for more than 12 months. When the asset is sold in ‘pension phase’, any capital gain would be exempt from tax.
This will primarily benefit the accumulators and pre-retirees (including transition to retirement). With a 10 year benefit of the tax offset, the strategy would be to maximise the use of the offset and realise the asset post-retirement (exempt from tax).
Please refer to the following links for further details:
Upper income limit 2010/11, based on family with 3 children.