The ATO’s benchmark rates for “market rent” have changed. Here’s why it matters.
The basic rule
Non-commercial supplies made by charities are GST-free.
For a housing agency, rent must be set below 75% of the market rent to be non-commercial and therefore GST-free.
When a housing agency makes GST-free supplies, it can claim input tax credits for all the GST spent in making the supply. This allows a housing agency to claim back all the GST it spent on a new development, or purchase of new residential property. This is a significant economic advantage for NFP charitable housing agencies.
As an aside, that is also why a charitable housing agency should never purchase brand new residential property using the GST margin scheme. The GST margin scheme prevents the purchaser from claiming any input tax credits.
Less than 75% of market rent
DHHS and the Victorian Housing Registrar have rent-setting policies. But the ATO threshold (less than 75% of market rent) matters too - if rents cross this threshold, GST input tax credits are put in jeopardy.
Obviously, market rent differs from property to property. This creates some difficult work in administering the many (sometimes thousands) of dwellings under management. You don’t have to obtain a sworn valuation in relation to each property, but you must have a sound basis for working out market rent in relation to each property.
The ATO requires ‘market value’ to be worked out by either:
- using ATO market value benchmarks; or
- applying the following successive tests:
- The ‘same supply’ test – where there is another person in the market making the same supply, you can use that supply as a market value benchmark. This would allow you to benchmark against identical dwellings. However, identical dwellings are rare.
- The ‘similar supply’ test – where there is no identical supply, you may benchmark against dwellings which are sufficiently similar. For housing, this would look at similarities in size, quality, features, location and lease conditions. Comparison should be against private rental, not other affordable rental property.
- Other methodology – where no similar supply can be identified, charities can ask the ATO to approve an alternative methodology. It would be surprising to find this approach in housing, since similar supplies are almost always available.
What is the catch with ATO benchmark rates?
ATO benchmark rates are convenient, but arbitrary. They are now divided into geographic areas, with different benchmark rates set for each area. Previously, benchmark rates were just set on a capital city basis.
Where a housing agency was relying on generous ‘Melbourne’ benchmark rates previously, some properties may now fall into other geographic categories with different (lower) benchmark rates. The benchmark rate may fall far enough to cause your current rental to exceed 75% of the benchmark rate for some properties.
What should I do?
If you rely on market values, you don’t need to do anything in response to the benchmark rates. However, you should be reviewing and re-setting your market values for properties on an annual basis.
If you rely on benchmark rates, you should:
- Review the new benchmark rates and re-categorise your properties into the relevant geographic areas. Look for instances where your current rents exceed 75% of the new benchmark rates.
- Where you find anomalies, look to actual market rates (similar supply test) to verify whether you are charging in excess of 75% of the market rent.
- Make sure you’re not charging more than 75% of the market rent.
For more information, please contact Andrew Boer, Practice Leader at Moores on 03 9843 2100 or alternatively you can fill out the enquiry form below.