NRAS is a tax scheme; a property investment must stack up on its own: Margaret Lomas

Investors of anything should only ever buy investments that stand alone as strong and viable propositions not because of tax benefits.

It’s no secret that I am not a fan of NRAS property.  I’ve written extensively about it since it was first introduced and watched how an essentially great scheme has been prostituted for gain for greedy developers and their marketers.

In its purest form, NRAS was a scheme designed for large institutional investors, such as public superannuation funds and insurance companies.  They would undertake these developments, which were built in lots of 100, and gain the tax credits for the lot.  It was a good deal and a good idea, providing discounted rent to para professionals who would, it was claimed, make suitable tenants. The scheme was not designed for individual investors.  In fact the NRAS Policy Guidelines stated:

The scheme encourages large-scale investment in affordable housing so it is not directly available to small-scale, private, individual investors in the rental property market.

Somehow, probably due to one of those tax office loopholes, some of the developments were sold to individuals as single lots.  The powers that be clearly didn’t sew up the scheme tightly enough, and someone drove a Mack truck through the space.  I still remember the day the tax office woke up and realised that it had no method in place to deal with the tax returns of individuals who bought them, and it scurried about with transitional arrangements to cope with the issue.  Lo and behold a precedence was created, and before we knew it whole companies were set up to move this latest tax advantaged product.   NRAS Policy Guidelines were amended to include:

Individual investors may wish to participate in the scheme as part of a non-entity joint venture or another joint venture arrangement or by purchasing NRAS dwellings from an approved participant.

It’s pretty easy to counter the flippant claims of NRAS marketers when they use simplistic three line statements espousing the benefits of buying one – just buy it, discount the rent and get tax benefits–with a plethora of dangers;

1. The middlemen do make big commissions – I’ve not seen one less than $20,000, and you’d have to be very dull to be convinced that this isn’t built somewhere into the price.
2. They are released in lots of 100 – that’s a very large influx of competition all at the one time – affecting both the capital value and the potential rent return. Your 20% discount may end up being a 20% discount to a rent that has already dropped by 30% because of oversupply!
3. They are rarely built in hotspots, and when they are, well, refer to point 2!

But in a recent email to me from an investor who recently felt similar concern to mine over the legitimacy, or otherwise, of these investments, far greater issues were brought to my attention.  Proponents may claim that in return for a financial loss each year of between $3,500 and $5,000 you get "tax-free" money of $9,980, but the writer of this email found that to be potentially misleading in the extreme.

This investor had such a great concern that he sought a private ruling, and to his alarm he found the following:

• A portion of the rebates for this scheme ($2495) are provided by the state in which the property is built. As state governments cannot raise income tax, the portion of the rebates received from the state cannot be considered a tax offset. This portion of the rebates received is known as NANE income.
• As entering the scheme is for the purpose of receiving a rental income and the NANE, claims related to the investment property must be apportioned.
• On low rental properties, this can reduce claimable rental expenses by as much as 17%.

The investor who wrote to me wanted to be sure that he had it right, and so he telephoned the person who provided the ruling. This person advised that a further ruling was not necessary as the position is clear:  those costs relating to the scheme – being the initial NRAS set-up cost, the annual audit cost for scheme payment eligibility and the periodic rental market rates audit – are not considered expenses related to the derivation of assessable income.  Neither the NANE nor the Commonwealth tax offset, are considered assessable income.

He went on to apply this information to one set of figures provided by one of the many companies promoting NRAS, and found that the swing was $141 per week!  That pretty much wiped out the positive cashflow, and if the property could not actually be leased for the rent amount forecast by the seller (which is what I am finding with many of these once they are constructed and settled) it could leave unsuspecting investor in quite a financial pickle!

This was one smart investor who, rather than believe everything presented to him by a property seller, chose to do the due diligence himself.  Getting a private ruling was a good move, one all investors should take before taking the plunge on any scheme that sounds so good.

While I agree that NRAS isn’t olive trees or an emu farm, it’s still a tax scheme, and its opponents draw their comparison from this notional similarity, rather than from any physical likeness between the two.  It’s not the physical product itself which is being attacked – it’s the marketing of the tax scheme over the property itself.  Luring investors into a property based on getting tax benefits can be compared to stock market- based investments, as the results can be the same – the investor buys the asset for the overlying scheme, giving little consideration to whether the scheme is appropriate for them, or whether the underlying asset stacks up. Investors of anything should only ever buy investments which stand alone as strong and viable propositions – tax benefits, income guarantees or free holidays should only ever be icing on an already tasty cake.

Margaret Lomas is a best-selling author and writes and hosts the popular Property Success With Margaret Lomas and heads up the panel on Your Money, Your Call, both on Sky News.