Checking the numbers game

The National Rental Affordability Scheme has generated polarised opinions in the media lately after some industry commentators spoke out against the scheme.

Their argument was based on two major premises – that investments in any property should be able to stand up based on the underlying asset, and that the examples given of possible cash flow scenarios were false based on information from several recent private rulings from the Australian Taxation Office.

On the first point we agree – investment in any property needs to be backed by due diligence and careful research. There will be good properties in the NRAS scheme, and bad properties, and it is up to you as a careful investor to be able to distinguish between the two. Of course it goes without saying that this same rule applies to properties that are not in the NRAS scheme.

The bottom line is, do your homework. Are there too many properties being released in the same area? Will growth be underpinned by strong socio-economic drivers? Are the agents involved in the transaction getting paid too much commission?

To suggest that NRAS properties are tainted because you need to ask these questions is cheeky (and slightly nonsensical). Surely you should be asking these types of questions of every property you choose to invest in?

The second point, centres on private ruling advice from the Australian Taxation Office which suggests that a portion of income paid under the scheme is not claimable as a rental expense.

Firstly, a word about private rulings. As the name suggests, they are private and based on the applicant’s personal situation. To use alarmist figures from such a ruling and suggest they will apply to everyone’s situation is misleading at best.

Of course this is the trap we can often fall into as media commentators – we seek the most extreme example to illustrate our point and neglect to mention the shades of gray in between.

But let’s focus on the issue at hand, which is– according to the ruling – the income derived from the state tax offset is classified as Non-Assessable Non-Exempt (NANE) income and must be apportioned.

While some would question whether this goes against the ambit of the scheme in the first place (and I am sure those questions are being asked of the Australian Taxation Office as we speak), we have checked a number of our recommended NRAS properties with top accountants and the worst figures they can see is that if this private ruling is applied to everyone then an investor may be out of pocket $34 a week compared to the scenario prior to the application of this private ruling – less than a quarter of the swing of $141 a week suggested. The key issue is this though – the property still remains strongly cashflow positive even with the private ruling applied.

For example on one NRAS property we have available the property is still positive cash flow $46,000 in the first 10 years. (Based on 65k income, 6.5% interest and within 10 k’s of the Melbourne CBD)

We could go on with this to spark an endless debate fuelled by countless examples and scenarios with empty figures attached, but it would be a pointless exercise and no doubt confuse the situation further. Once again: make sure the numbers stack up in your personal situation.

And until there is a more concrete answer from the ATO about the broader application of this ruling, there is still an element of ‘watch this space’ to play out on this issue. A always at The Successful Investor we take the conservative approach so until notified otherwise we run all our cash flow projections based on this private ruling.

For the final word, we refer back to our seasoned commentator’s suggestion that investors need to give consideration to whether the calculations behind the underlying asset stacks up. It’s just a shame that their own calculations don’t stack up in this case.