NRAS and Tax Offsets for SMSF

Hi t-dorg

Don't get too caught up with all the technicalities and wording of how the NRAS incentive works.

What you really need to know is that your SMSF will be the beneficial owner of the property and hence will receive the all the taxation and incentive benefits. 

As with your previous SMSF purchase the entity which 'holds' the property title for legal purchases is your 'Magpie Pty Ltd' (as trustee for your custodian trust – of which your SMSF is the sole and primary beneficiary) – whereas for tax and NRAS purposes it will be the SMSF which 'holds' the property.

As you should know, the NRAS benefit is currently split into two parts – $6855 from the Federal government and the remaining $2285 from the state government. The $6855 will come through as a refundable credit when you lodge your SMSF income tax return.  The $2285 from the QLD government will come through as either a cheque or direct deposit.  When you nominate the account for the direct deposit – provide the SMSF's bank details.

Both amounts are non-taxable income from the SMSFs perspective – but ensure your accountant includes them in the tax return as they could easily be overlooked.

As you have mentioned, you are utilising your existing 'external trustee company' (trustee of the your custodian trust) to be the trustee of the second custodian trust which will hold the legal title of the NRAS property.  This should be fine however double check with your solicitor for any potential land tax implications.  I was recently told by a lawyer that in QLD that they are going to start grouping properties owned by separate trusts with the same trustee company as one 'entity' – and only one threshold across all the trusts with the same trustee company.

A couple of other points that are important with your purchase:

1. Finance – you mentioned that you have already successfully completed one SMSF purchase using a limited recourse loan and custodian trust (instalment warrant).  This means you have a good idea of the additional work you need to do to get the finance approved.

You need to ensure that you are able to be able to obtain finance for the NRAS property.  I have heard that some banks and other lenders are still difficult when it comes to obtaining finance.  I actually had one client who had to fly to Sydney to get an NRAS loan happening through Westpac (purchased in individual names 90% LVR – not via a SMSF instalment warrant).

Combining the NRAS with the SMSF instalment warrant / limited recourse loan structure may make the lenders a little uncomfortable – so ensure you at least get some form of indicative approval before signing a contract and give yourself enough time to get finance approved.

2. Tax implications – NRAS properties generally stack up pretty well from a cash flow perspective due the $9140 government handout as compensation for the discounted rent.  The real cherry on the top however are the nice juicy tax deductions NRAS properties can generate. 

To get the advantages of this negative gearing benefit, you typically need to be making more than the 9% SGC contributions into your SMSF.  If you are under age 50 you are limited to $25k per annum in this regard ($50k per annum if you are 50+ ).  You need to ensure that your SMSF is going to have enough other taxable income (i.e. from taxable contributions / SGC / salary sacrifice) to absorb any tax losses from your NRAS property PLUS any tax losses from your other property to ensure that you get the maximum tax benefits.

I think it is great that you have already successfully completed the purchase of one property using your SMSF and a limited recourse loan / instalment warrant structure.  If you keep focussed on cash flow then you should quickly be able build up more excess cash in your SMSF and use it to fund future property purchases.

In regards to finding further resources, the NRAS developers / promoters can probably point you in the right direction.  My firm (accountants) has a relationship with a NRAS company who refers their purchasers to us for advice on the correct structure for the property purchase – and a SMSF has quickly become a popular choice in this regard.

If you have any further questions, please feel free to let me (and the other forum users) know and we will do our best to provide you with some answers.

Good luck!

Hey again tdorgan,

Another thing I previously didn't mention was that with SMSF limited recourse loan purchases (previously known as instalment warrants) – you can only have one property per trust.  This was clarified by the government in their update to the SMSF borrowing rules that came into effect on the 7th of July 2010.

This means one property per custodian trust.

Funny thing is, if you purchase an apartment and the car park comes on a separate title – then you need two custodian trusts – one for the apartment, and another for the car park!  Annoying.

My company was approached by a guy who was working as an agent for a NRAS property development business, and he promised he would refer dozens of clients to us so they could get advice on the most appropriate structure to use for their NRAS purchase. 

Almost 1 year later we have not heard a peep – I don't think this is to do with the NRAS properties themselves – but it is curious!

Let us know how the purchase turns out.

Hey Tim,

Yes – that is correct – bare trust, property trust, debt trust, custodian trust all names for the same thing when talking about SMSF borrowing / limited recourse loans.

You need another company (with it's own ACN – not ABN) in addition to the trustee company of the SMSF for most lenders.

The following table is a quick reference to what the lenders currently require in regards to trustee companies for SMSFs and custodian trusts with limited recourse loans:

One of the reasons, I believe, that at least one of the trustees must be a company is that legally individuals can't transact with each other when they are acting as trustees – but a company as trustee and individuals as trustees can.

Looking at the above table, it is prudent that you have trustees companies for both your SMSF and your custodian trust.

There are a couple of articles on my blog (see link in signature) about using trustee companies if you want to learn more.

Any other questions let me know.

Hi Tim

Sorry for the delayed response

You should only need one Pty Ltd security trustee company for multiple properties as it can act as the trustee for multiple custodian / property trusts.

I hope this clarifies.

Hi Tim,

You need an agreement with the NRAS manager, the thing the lenders look for are:

1. You are able to get our withing 90 days.
2. The cost of getting out (best if less than $1K).

I have a small allocation in Qld in an entity with a business partner and we have structured our agreements to fit with what the banks want. These to things were what were stressed to us, and we have had no issue with buyers getting 80% LVR.

With regard to SMSF lenders, Westpac do 80% if there is a corporate trustee and 72% if there is an individual trustee.

Regards
Alistair