Bills Digest No. 7, 2019–20

National Rental Affordability Scheme Amendment Bill 2019

Social Services

Author

Paula Pyburne

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Introductory Info Date introduced: 4 July 2019
House: Senate
Portfolio: Family and Social Services
Commencement: Sections 1–3 on Royal Assent; Schedule 1 items 1–5, 7–11, 13–16 and 18–20 on the day after Royal Assent; all other items on the earlier of a day to be fixed by Proclamation or 12 months after Royal Assent.

Purpose of the Bill

The purpose of the National Rental Affordability Scheme Amendment Bill 2019 (the Bill) is to amend the National Rental Affordability Scheme Act 2008 (the NRAS Act) to:

  • clarify ambiguous provisions
  • specify that the object of the NRAS Act is to be achieved by protecting tenants in the National Rental Affordability Scheme (the Scheme), protecting investors, providing rights to investors and recognising state and territory contributions to the Scheme
  • identifying the Constitutional powers on which the NRAS Act is based and
  • clarifying the regulation-making powers of the NRAS Act.

Background

About the NRAS

The Scheme is established by the National Rental Affordability Scheme Regulations 2008 (NRAS Regulations). It is an Australian Government affordable housing initiative, delivered in partnership with state and territory governments. It commenced in 2008. Under the Scheme, the Australian Government in conjunction with the states and territories provides financial incentives to:

  • increase the supply of affordable rental housing
  • reduce the rental costs for low to moderate income households and
  • encourage the large-scale investment and innovative delivery of affordable rental housing.[1]

Introducing the originating Bill into Parliament, then Minister for Housing Tanya Plibersek stated:

The National Rental Affordability Scheme is a major supply-side initiative to make rental properties more affordable by encouraging large-scale investment in rental housing for low- and moderate-income earners.

The National Rental Affordability Scheme will create up to 50,000 new rental properties across Australia at a cost of $623 million in the first four years.

The scheme will offer institutional investors and other eligible bodies annual rental incentives every year for 10 years, provided the conditions of the scheme continue to be met.

The incentive is made up of a Commonwealth contribution of $6,000 per dwelling per year and a state or territory contribution in the form of direct financial support or in kind contribution to the value of $2,000 per dwelling per year.

Incentives will be indexed to the rental component of the consumer price index.

The scheme is deliberately targeted at low- and moderate-income households.

Incentives are only available to providers on condition that dwellings are rented to low- and moderate-income households at 20 per cent below the market rate.

More than 1.5 million households will be eligible for tenancies under the scheme, including key workers: entry level police officers and teachers, carers, apprentices, cleaners, hospitality staff and childcare workers, for example.

The scheme provides a new opportunity for all levels of government, the business sector and the not-for-profit organisations to work together to increase the supply of rental housing.

The government expects the scheme will facilitate new and creative partnerships between institutional investors, developers and community housing providers. Involvement of both investors and the not-for-profit charitable sector is crucial to its success.[2]

The Department of Social Services (DSS) is responsible for the administration of the Scheme in consultation with the Australian Taxation Office and the Departments of Treasury, and Finance and Deregulation. The Australian Government also works closely with State and Territory governments in the ongoing management of the Scheme.[3]

In the 2014–15 Budget, the Government announced that the Scheme would be discontinued and that the planned final round of the scheme would not proceed.[4] This meant that the Scheme was capped at 38,000 allocations.[5] The Scheme will conclude in 2026.[6]

How the Scheme works

Much of the detail of the Scheme is set out in the in the NRAS Regulations, rather than in the NRAS Act itself.[7] The operation of the Scheme is set out in table 1 below.

NRAS investors

NRAS investors are third parties that own the rental dwellings. Neither the NRAS Act nor the NRAS Regulations refer to NRAS investors. They can be beneficiaries of the NRAS incentive and may also participate in the Scheme as part of a consortium or trust. NRAS investors and approved participants generally enter into contractual arrangements where the approved participant manages compliance with the Scheme regulatory requirements and passes on all or part of the NRAS incentive to the NRAS investor.[16] The Bill inserts references to investors.

Reviews of the Scheme

The Scheme was subject to Australian National Audit Office (ANAO) performance audits in 2015[17] and in 2016.[18]

The first of the audits found that the administration of the application and assessment process and management of reserved allocations for the Scheme had not been effective.[19] The second found that the effectiveness of the Department of Social Services’ administration of NRAS allocations and incentive claims had been mixed.[20] The ANAO suggested that the Regulations ‘could be reviewed with the aim of simplifying and clarifying aspects of their operation’.[21]

History of the amendments

The amendments in the Bill were originally contained in Schedule 3 to the Social Services Legislation Amendment (Housing Affordability) Bill 2017 (the first Bill).[22]

The first Bill was introduced into the House of Representatives on 14 September 2017 and subsequently referred to the Senate Standing Committee on Community Affairs (Community Affairs Committee) for inquiry and report.[23] The report was published on 6 December 2017.[24] Whilst the majority Senators on the Committee recommended that the first Bill be passed, the Australian Labor Party (Labor) Senators made dissenting comments about certain aspects of the amendments in Schedule 3 to the first Bill.[25]

Importantly, the Government tabled its response to the Community Affairs Committee report on 17 October 2018[26] and subsequently moved amendments to the first Bill.[27] Those amendments were debated and passed in the House of Representatives.[28] Although the first Bill had been introduced into the Senate, no relevant debate occurred. The first Bill lapsed when the 45th Parliament was prorogued.

This Bill

The amendments in this Bill are in equivalent terms to those in Schedule 3 of the first Bill as introduced in the Senate—that is, the Government amendments which were debated in, and passed by, the House of Representatives are included.

Committee consideration

Selection of Bills Committee

On 4 July 2019, the Senate Standing Committee for Selection of Bills deferred consideration of the Bill to its next meeting.[29]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest the Senate Standing Committee for the Scrutiny of Bills had made no comment in relation to the Bill.

Policy position of non-government parties/independents

At the time of writing this Bills Digest, no comments which are specific to this Bill had been made by non-government parties or independents. However the comments made in relation to the first Bill where relevant, are discussed under the heading ‘Key issues and provisions’ below.

Position of major interest groups

At the time of writing this Bills Digest, no comments which are specific to this Bill had been made by stakeholder groups. However the comments made in relation to the first Bill where relevant, are discussed under the heading ‘Key issues and provisions’ below.

Financial implications

According to the Explanatory Memorandum to the Bill the measures will have nil financial impact over the forward estimates.[30]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[31]

Parliamentary Joint Committee on Human Rights

At the time of writing this Bills Digest the Parliamentary Joint Committee on Human Rights had made no comment in relation to the Bill.

Key issues and provisions

Updating the objects of the NRAS Act

The object of the NRAS Act is to encourage large-scale investment in housing by offering an incentive to participants in the Scheme so as to:

  • increase the supply of affordable rental dwellings and
  • reduce rental costs for low and moderate income households.[32]

Item 2 of the Bill inserts proposed subsection 3(2) into the objects section to make clear that the object of the NRAS Act is to be achieved in ways that include:

  • protecting tenants of rental dwellings covered by allocations
  • protecting investors
  • providing rights to investors and
  • recognising the contributions, in cash or in kind, made by states and territories to participants in the Scheme.

Item 5 of the Bill inserts the definition of the term investor, into section 4 of the NRAS Act. An investor in relation to a rental dwelling covered by an allocation is a person who is the legal or beneficial owner of the rental dwelling and who is not an approved participant in relation to the rental dwelling.

Constitutional basis of the NRAS Act

The Commonwealth has no specific power under the Constitution to make laws in respect of housing or housing affordability. At the time that the NRAS Act was enacted, neither the Act itself nor the Explanatory Memorandum to the originating Bill specified the Constitutional powers on which it was based.[33]

What the Bill does

Item 3 of the Bill inserts proposed section 3A into the NRAS Act to outline formally its Constitutional basis. The NRAS Act is based primarily on section 51(ii) of the Constitution—being the power to make laws with respect to taxation; but so as not to discriminate between states or parts of states.[34]

Proposed subsections 3A(3), 3A(4) and 3A(6) provide additional and severable Constitutional bases for the operation of NRAS Act. According to the Explanatory Memorandum to the Bill the purpose of these provisions is to ensure:

 ... that if a court finds that the Commonwealth’s legislative power does not support the Act, a particular provision or multiple provisions of the Act or the Income Tax Assessment Act 1997, the Act will still be valid to the extent to which it is based on other legislative powers.[35]

These alternative powers are:

  • section 51(xxix), the external affairs power, specifically to give effect to Australia’s rights and obligations under paragraph 1 of Article 2 and Article 11 of the International Covenant on Economic, Social and Cultural Rights done at New York on 16 December 1966, as in force for Australia from time to time
  • section 51(xx) (called the corporations power) which refers to foreign corporations and trading or financial corporations, formed within Australia. Essentially, to be considered a trading or financial corporation, an entity must be first, incorporated and second, engaged in ‘substantial’[36] trading[37] or financial[38] activities. To that end, the NRAS Act will have effect in relation to:
    • the regulation of activities, functions, relationships or business of an investor or approved participant that is a constitutional corporation[39]
    • the creation of rights or privileges belonging to an investor or approved participant that is a constitutional corporation[40]
    • the imposition of obligations on an investor or approved participant that is a constitutional corporation[41]
    • the regulation of the conduct of persons or entities through which the constitutional corporation acts[42] and
    • the regulation of persons or entities whose conduct affects or is capable of affecting the activities, functions, relationships or business of an investor or an approved participant that is a constitutional corporation.[43]
  • section 122 (called the Territories power) which will allow the NRAS Act to apply to:
    • a rental dwelling that is located in a Territory
    • an approved participant or investor who is a resident of a Territory
    • an approved participant or investor that is a body corporate, incorporated in a Territory; a body corporate that is taken to be registered in a Territory;[44] a trust, if the proper law of the trust and the law of the trust’s administration are the law of a Territory; or an entity, where the core or routine activities of the entity are carried out in or in connection with a Territory.

Matters to be contained in regulations

As stated above, the NRAS Act contains a broad power for regulations to prescribe the Scheme.[45] The Bill contains a number of amendments to more clearly articulate the nature and extent of matters to be prescribed.

Obligations of existing participants

Currently paragraph 5(a) of the NRAS Act requires regulations to be made about the approval of participants in the Scheme. However, as set out above and in the Explanatory Memorandum to the Bill ‘allocations are no longer being made under NRAS’.[46]

Item 6 of the Bill repeals and replaces paragraph 5(a) so that the regulations must prescribe the obligations of participants that have been approved by the Secretary. As no new approvals are being made, the amendment ensures that the regulations apply to existing approved participants only.

Approved participant passing on incentive to investor

Currently, section 6 of the NRAS Act provides that the Scheme may include additional matters—for instance, the assessment criteria for an allocation and the amount of an incentive.[47] Items 7–10 of the Bill amend section 6 to expand those matters.

Item 7 inserts proposed paragraph 6(ca) into the NRAS Act to allow the Scheme to provide for the adjustment, in certain circumstances, of the amount of an incentive that is to be provided or has previously been provided, to an approved participant. The Community Affairs Committee report highlighted concerns by some stakeholders that approved participants had, in some cases, failed to pass on an incentive to an investor.[48]

The NRAS does not require an approved participant to own the rental dwelling for which they hold an allocation. Many rental dwellings are owned by a third party investor. A common arrangement is for the investor and the approved participant to have a contractual arrangement where the approved participant manages compliance with the NRAS regulatory requirements and passes the incentive on to the investor, usually after deducting a fee.[49]

In 2017, the Regulations were amended to impose new obligations on an approved participant to pass on an incentive to an investor.[50] This amendment to the NRAS Act acknowledges that the adjustment of an incentive paid (or payable) may be required where an approved participant has failed to pass on the incentive to the investor.

Passing state/territory contributions to investors

The Scheme is a national program which is supported by a state and/or territory co-contribution. The Australian Government provides 75 per cent of the funding to approved participants, with the state and territory governments contributing the balance.[51] According to the Explanatory Memorandum:

There have been instances where approved participants have failed to pass on this State/Territory contribution to investors.  However, it is not clear that the NRAS Act currently permits regulations to be made relating to the circumstances in which the State/Territory contribution must be passed on to investors. [52]

To address this problem, item 8 of the Bill inserts proposed paragraph 6(cb) into the NRAS Act to allow the Scheme to provide for the passing on of contributions made by states and territories, or their monetary equivalent, by approved participants in certain circumstances.

Item 10 of the NRAS Act inserts proposed paragraphs 6(e) to 6(g) so that the Scheme may also make provision in relation to:

  • the protection of tenants of rental dwellings covered by allocations
  • the protection of investors and
  • the rights of investors.[53]

Clarify existing conditions

Under the NRAS Act once applications were assessed, offers of allocations or reserved allocations were made to successful applicants:

An offer of allocations was made to applicants where eligible dwellings were available for rent, while reserved allocations are a conditional offer for dwellings that are expected to become available at a later date. The conditions pertaining to reserved allocations generally related to the location, style, size and expected timeframe for the delivery of each associated dwellings.[54]

Existing subsection 7(1) of the NRAS Act states that the Scheme must provide for the Secretary to make an allocation for an incentive period in respect of a rental dwelling:

  • on the conditions set out in subsection 7(2)[55]
  • on the condition that an incentive may be offset or recouped in the circumstances provided for by the Scheme and
  • on any other conditions provided for by the Scheme.[56]

Calculating rent

Items 11–13 of the Bill amend subsection 7(2) to clarify existing conditions.

In particular, item 12 repeals and replaces subparagraph 7(2)(b)(ii) so that the NRAS Regulations must provide that it is a condition of approval that each charge of rent for the rental dwelling during the year is at least 20 per cent less than the market value rent for the dwelling. This means that ‘every time rent is charged, whether this is weekly, fortnightly, monthly or on any other basis, that rent must be at least 20 per cent below the market value rent’.[57]

This amendment is intended to address stakeholder comments to the Community Affairs Committee that ‘there is some ambiguity ... in that the below market rate could be determined by averaging rents of the course of the whole year’.[58] In its submission to the Community Affairs Committee, the Housing Industry Association stated that it would be:

... entirely counter to the objective of NRAS to provide affordable housing to those otherwise in housing stress if the provider were able to charge above the rental discount level at any stage during the year.[59]

Item 14 inserts proposed subsection 7(5) into the NRAS Act to balance the effect of that amendment. Under proposed subsection 7(5) the Secretary may decide in certain circumstances that the requirement that rent is, at all times during the year, at least 20 per cent less than the market value rent does not apply—provided that the Secretary is satisfied that such a decision will not result in an increase in rental costs for low and moderate income households.

The Labor Senators on the Community Affairs Committee which inquired into the first Bill acknowledged that some submitters to the inquiry:

... raised a practical problem that can arise in circumstances where an unintentional overcharge of rent occurs due to a market rent valuation on the NRAS property which results in a rent reduction in order to keep the rent at least 20 percent below market rent.[60]

The submission to the Community Affairs Committee by the National Affordable Housing Providers Ltd explains the problem:

Rent reductions are not uncommon following an MRV [market rent valuation]. A significant number of NRAS properties were built in those now declining mining communities precisely to deal with the lack of affordable housing several years ago. In other communities, even a small market downturn can result in a slight decrease in an MRV and any reduction in rent, even a few dollars, must be implemented immediately.[61]

According to the Explanatory Memorandum to the Bill:

The Secretary will only be able to use the discretion [in proposed subsection 7(5)] in relation to a specific charge for rent, for a specific allocation, where the overcharging of rent was inadvertent and the tenant had been compensated.[62]

Dwellings not rented

Under existing paragraph 7(2)(c), the Secretary may make an allocation for an incentive period in respect of a rental dwelling that is not rented during an NRAS year[63] that falls within the incentive period as long as the dwelling is not vacant:

  • for longer than the period prescribed by the regulations and
  • for longer than a continuous period prescribed by the regulations that begins in the previous NRAS year and ends in the first-mentioned NRAS year.[64]

A Scheme dwelling can be vacant for a period up to 91 days (13 weeks), cumulatively or continuously within a single NRAS year or continuously across two NRAS years, without incurring any financial penalty. For any vacancy in excess of this period, the value of the incentive payable is proportionally reduced. Where a dwelling is vacant for more than 182 days, no incentive is payable.[65]

Item 13 repeals and replaces paragraph 7(2)(c). Under proposed paragraph 7(2)(c) the Secretary may make an allocation for an incentive period in respect of a rental dwelling that is not rented during an NRAS year that falls within the incentive period provided that the dwelling is not vacant for longer than a period prescribed by the regulations.

This amendment addresses stakeholder concerns reflected in the Community Affair Committee’s report into the first Bill.

... approved providers were unduly disadvantaged when a vacancy period spanned two NRAS years, because even if there was a minimal crossover of the vacancy period to the second NRAS year, the approved provider would receive nil incentive payment for both years.[66]

Variation, transfer or revocation of allocation

Currently, section 8 of the NRAS Act states that the Scheme may provide for the variation, transfer or revocation of an allocation in certain circumstances and the manner in which the variation, transfer or revocation is to be made.

Proposed subsection 7(6) (inserted by item 14) provides that the Scheme may:

  • vary a condition of an allocation or impose a condition of an allocation[67] and
  • set out the circumstances (if any) in which the condition is varied or imposed.

The purpose of this amendment is to allow the Scheme to provide for the variation of a condition of allocation, including an allocation already made. While there is currently scope in the NRAS Act to attach conditions to allocations, there is no express authority to vary the conditions of allocations once made. The Explanatory Memorandum sets out the rationale for the amendment as follows:

The ability to implement new and varied conditions of allocations is important to further the objects of NRAS, and to protect eligible tenants and ensure the safety and viability of dwellings. For example, new conditions of allocation may be imposed to deal with certain emerging safety issues, such as a requirement to use certain non-flammable materials, or replace existing dangerous materials.[68]

The Labor members of the Community Affairs Committee which inquired into the first Bill noted:

Representatives of NRAS approved participants who made submissions [to the Community Affairs Committee] raised concerns over the breadth and lack of particularity of the discretion to vary conditions that the new subsection would provide to the Secretary.[69]

The amendment is drafted in broad terms. Importantly, it does not limit the variation of a condition to circumstances which specifically mitigate risk or to ‘emerging safety issues’. In relation to a similar amendment in the first Bill, the Labor members of the Community Affairs Committee recommended that the Bill should provide that the legislative authority to vary conditions attached to allocations is confined to circumstances where a variation is necessary to mitigate an emerging risk to:

  • a tenant of an NRAS dwelling
  • an NRAS approved participant
  • an NRAS investor or
  • the integrity of the Scheme.[70]

Item 15 of the Bill inserts proposed paragraphs 8(ba) and 8(bb) so that the NRAS may also provide for:

  • the transfer of all allocations made to an approved participant to another approved participant or other approved participants in certain circumstances
  • the transfer of an allocation to another rental dwelling in certain circumstances.

According to the Explanatory Memorandum to the originating Bill:

It is also envisaged that transfer of an allocation to another approved participant in the Scheme in certain circumstances may be desirable.  For example, this could occur in circumstances where a rental dwelling is sold to another approved participant in the Scheme who will continue to provide the property for rent in accordance with the Scheme requirements.[71]

Despite there being an expectation that Scheme allocations may need to be transferred from one dwelling to another, the NRAS Act as enacted did not enlarge on the nature of the power. The amendments made by item 15 address this.

Enforcement

Item 16 of the Bill inserts proposed sections 10A and 10B into the NRAS Act.

Proposed subsection 10A(1) will empower the Secretary to accept a written undertaking given by an approved participant in relation to the Scheme. The approved participant may withdraw or vary the undertaking at any time—but only with the written consent of the Secretary.[72] The Secretary may cancel the undertaking by sending a notice to that effect in writing to the approved participant.[73]

Proposed subsection 10B(1) of the NRAS Act provides that the Secretary may apply to the Federal Court of Australia for an order that the approved participant has breached an enforceable undertaking.

If the Court is satisfied that is the case, it may make any or all of the following orders:

  • an order directing the approved participant to comply with the undertaking
  • an order directing the approved participant to pay to the Commonwealth an amount of any financial benefit that he or she obtained directly or indirectly and that is reasonably attributable to the breach
  • any order that the Court considers appropriate directing the approved participant to compensate any other person who has suffered loss or damage as a result of the breach and
  • any other order that the Court considers appropriate.[74]

Concluding comments

The amendments in the Bill will ‘flesh out’ the legal authority for the Scheme which is contained in the NRAS Regulations.

The report of the inquiry into the first Bill by the Community Affairs Committee states:

The committee was concerned to receive evidence from some submitters regarding some NRAS approved participants potentially acting contrary to the intent of NRAS, and to the detriment of NRAS investors and their property managers.[75]

That being the case, the inclusion of the enforcement provision is likely to be welcomed.