The National Rental Affordability Scheme or commonly known as (NRAS) is an Australian Government investment scheme targeted at investors to help reduce the potential tenancy crisis. The Australian Government will give you a $9,140.00 PA tax credit for the next 10 years.
In simple form the property owner rents their property for 20% to 25 % (depending what state your in) under market rent , and the government provide $9,140.00 of tax credits. This increases with CPI over 10 years.
This tax credit actually comes of your tax bill not your taxable income. If there is a surplus after tax you will receive a cheque for the balance.
There has been some concern about the term “affordable housing” and how it relates to government funded housing, NRAS is not government housing , its primarily set up for tenants who in the up and coming years would most likely be priced out of the rental market. NRAS tenants are only eligible for the reduced rent if they are currently employed and have a certain level of income. Typical tenants would include community essential persons such as policemen/women, firemen, teachers, office workers, nurses, shop assistants, hospitality workers etc. This is NOT ‘social housing’ or ‘housing commission’. Tenants can NOT be on government social security benefits.
Why is the State and Federal Government Funding this Scheme?
There are two main policy objectives for the Federal Government
• To Reduce the Massive Housing Shortage.
• To Improve Rental Affordability.
NRAS will provide government incentives of $623m for 50,000 new affordable rental dwellings to be occupied between January 2009 and June 2012.
How does the incentive work?
• An incentive, in the form of a refundable tax offset of $9,140 per dwelling per year for 10 years.
• The incentive, is paid to owners as a tax offset certificate at the end of each tax year. Both the Federal and State Governments contribute to the Tax Offset.
• The Tenancy Manager sends a letter of compliance to the Government stating that your property was rented out in accordance with the terms and conditions of NRAS.
• Then the Government, through the ATO, sends a tax offset certificate valued at $9,140.00 to you.
• This refundable tax offset either directly reduces tax you pay OR if you do not pay any tax is paid as a cash payment.
• The incentive is paid annually after you lodge your tax return and increases each year with rental CPI.
Is it worth while?
• The NRAS incentives are worth $9,140 per year ( CPI adjusted ) paid regardless of the level of rent you receive. Guaranteed for 10 years.
• If your annual rental income is $20,000 and the tenant pays 20% below market value, then you give away $4,000 to the tenant, to receive $9,140.00 from the government.
• Basically you give the tenant a SMALL discount and the government gives you a BIG incentive. The negative gearing is increased by the reduced rent allowing you more tax advantages and the government gives you a further tax free incentive with the $9,140.
• In this example above you are $5,140.00 per year better off
• The annual incentive of $9,140 is TAX FREE and is not assessable for Income Tax.
• The TAX FREE status of the incentive amplifies your investment returns. As you still receive all of your normal depreciation and investment allowances.
Note: The NRAS payment may cease to be beneficial if the market rent was above $900 per week.
• Many people ask ‘can you pull out at any time’? The answer is yes but only by selling the property. The contract is binding for 10 years. The buyer will need to be looking to purchase an NRAS property so your buyer market may be limited.
Benefits for investors:
• 10 year head lease
• Full property management services
• Insured occupation rates, rental payment and tenant damage cover
(The owners benefit from a ‘secured income stream’ through a unique mix of group insurance, self insurance and risk management through approved property managers).
• Most Properties are CASH FLOW POSITIVE
• Improved Rental Yields with a minimum $9,140 tax free incentives per dwelling per year
• More than $90,000 of tax free incentives over 10 years (increased with CPI)
• Subsidised by both Federal & State governments
• Incentive is not dependent upon property value
• Other tax arrangements attributable to investment properties still remain
• Potential for reduced vacancy risk due to discounted rental
• Increased saleability due to the NRAS enhanced property
• Tax benefits i.e. increased negative gearing (reduced initial rental income) and the tax free $9,140
Scenario:
Michael earns $75,000 per year and his wife Susan works part-time earning $30,000 per year. They have two children and own their own home valued at $500,000 with a mortgage of $280,000.
They purchase a house and land package for $350,000 and the completed house has a market rental income of $350 per week. The interest rate on their loan is 6.79%. Here’s the comparison for Michael and Susan:
| No Property | Non NRAS Property | NRAS Property | |
| Tax Payable | $21,675 | $14,903 | $4,604 (after NRAS add-back) |
| Tax Saving | $0.00 | $6,772 | $17,071 |
| Tax Reduction | 0% | 31% | 79% |
| Cashflow | $0.00 per week | Neg -($104) p/wk | Pos $22 p/wk (increases over time) |
If Michael and Susan don’t purchase an investment property they pay more tax and don’t have the wealth opportunity that an investment property offers. If they choose a non-NRAS property investment property they will need to reduce their living expenses to accommodate their investment.
Choosing an NRAS Property gives Michael and Susan huge tax savings, they don’t have to adjust their lifestyle because the property is cashflow positive, and they have the future wealth opportunities from the growth in value of their investment property.
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