NRAS property investment can provide positive cashflow for SMSF investors: Onyx

DIY super investors should consider acquiring an NRAS property because of the positive cashflow benefits, according to a new report by property investment and financial advisory firm Onyx Wealth.

Investing in a property that qualifies for the government’s national rental affordability scheme (NRAS) is a way for SMSF trustees to avoid being in the position, where they hold a property that is both negatively geared and provides negative cashflow, according to report authors Paul Thewlis and Margaret Hardy.

Such a holding would require the SMSF to have large enough liquid assets and/or cash inflows to allow for these losses.

In an interview with Property Observer last week, Brisbane apartment developer David Devine said SMSF and NRAS investors were among the biggest buyers of off-the-plan projects developed by his Metro Property Development company, which has the two top selling projects in inner Brisbane.

Metro has marketed more than 50% of the 308 apartments in its Madison Heights development as NRAS-approved investments, compared with 20% in its first development, the Chelsea, now completed.

But yesterday, property investment advisor Margaret Lomas warned investors against investing in NRAS properties, labelling it a tax scheme intended for institutional investors and said investors considering the scheme should seek a private tax ruling "before taking the plunge on any scheme that sounds so good".

SMSFs can purchase an NRAS approved property, which provides an annual tax free incentive estimated at $119,833 over the next 10 years.

In return, the property must be rented out to eligible tenants at a rent at least 20% below market rent as assessed by an independent valuer, with eligible tenants determined by government income thresholds.

“NRAS properties have greater negative gearing than equivalent non-NRAS properties,” explain Thewlis and Hardy.

“By giving up 20% of the taxable rental income the SMSF increases its tax loss. Normally a loss is undesirable, but in this case it is usually offset by the value of the NRAS incentive.

“Take for example an NRAS property which has a market rental value of $300 per week. A 20% discount on that rent means the SMSF is giving up $60 per week of taxable income.

“At the same time, the SMSF gains $190 per week of untaxed income in the form of the NRAS incentive."

Due to superannuation act rules SMSFs can only purchase completed or off-the-plan property

The majority of NRAS properties purchased by Onyx Wealth clients are priced between $250,000 and $400,000.

Because they are new properties, they also have the tax benefit of having greater depreciation allowances than older property.

Another benefit is stamp duty savings in some states.

“SMSFs buying property off the plan can benefit from substantial stamp duty savings. For example, in Victoria and Western Australia, purchasers who buy apartments off the plan prior to construction only pay stamp duty on the land value apportioned to each individual apartment,” explain Thewlis and Hardy.

Onyx Wealth provides the following example to show income generated for a SMSF with no property investment, an SMSF with a normal property investment and an SMSF with an NRAS property investment: