Tax guide on the National Disability Insurance Scheme
The National Disability Insurance Scheme (NDIS) came into effect on July 1, 2013. Under the new system, disability support will be provided to eligible participants or their representatives on their behalf.
The income tax and GST implications should not be overlooked. If you are a supplier of disability support to participants, have you considered whether GST applies to your supplies? For participants or representatives who receive NDIS payments, have you considered whether the payment received is income tax exempt?
We run through the GST and income tax treatment affecting the relevant parties below.
GST treatment of supplies made to participants
From July 1, 2013, any supplies made by an entity (the supplier) to an NDIS participant (or representative) are GST-free subject to certain conditions being satisfied. Supplies that may be GST-free include sales of equipment, hiring of equipment, and services.
In particular, the following conditions must be met for a supply to be GST-free. The supply must be:
- to a participant for whom a plan is in effect under Section 37 of the National Disability Insurance Scheme Act 2013 (NDIS Act)
- of one or more of the reasonable and necessary supports specified in the statement of supports in the plan
- made under a written agreement between the supplier and the participant (or another person)
- between the supplier and the participant (or another person) that both:
- identifies the participant
- states that the supply is one or more of the reasonable and necessary supports specified in the statement of supports in the plan
- of a kind determined in a legislative instrument by the minister responsible for disability services.
The supplier will need to keep records that explain all transactions for its supplies, including a copy of the written agreement. Generally, the supplier will need to keep these records for a period of five years after completion of the relevant transaction.
The case study that follows illuminates the importance of a written agreement:
Case study: Dmitri requires five hours of support on a weekly basis that is specified as reasonable and necessary in his plan. He requests XYZ Co to supply him with the support for a period of three months based on the NDIS published price. Dmitri provides XYZ with a letter identifying that he is a participant and the relevant part of his plan that specifies the type of support required. XYZ writes to Dmitri to confirm its agreement to
provide the support, including the start date, and signs the letter.
Outcome: If all the other requirements (see above) are met, the supplies that XYZ makes to Dmitri as specified in Dmitri’s plan are GST-free.
Tax treatment for receipt of NDIS payments
(i) Participants
NDIS amounts received directly from the National Disability Insurance Agency (NDIA) for approved reasonable and necessary supports are exempt from income tax. Such participants are also exempt from income tax on NDIS amounts received when they are paid to another person on the participant’s behalf, such as a nominated representative, or a registered plan management provider (RPMP).
A. Deductions
A participant cannot claim a deduction for assets purchased or expenditure incurred that are funded using NDIS amounts. This includes deductions for depreciation of capital assets or certain other capital expenditure. This is the case even if the participant uses the asset or incurred the expenditure in the course of gaining or producing assessable income.
B. Net medical expenses tax offset (NMETO)
A participant cannot claim the NMETO for medical expenses incurred to the extent that those medical expenses have been funded by NDIS amounts. However, if the participant uses their own funds then, depending on their personal circumstances, they may be eligible to claim the NMETO if they have eligible out-of-pocket medical expenses – for instance, to pay for medical expenses not covered by your NDIS amounts.
The case study below helps elucidate where and when the NMETO can be claimed.
Case study: Andrea is a participant under the NDIS who has elected to self-manage her plan. Under Andrea’s plan, she receives $8,000 that is allocated for the purchase of a prosthetic limb, an eligible medical expense for the purposes of NMETO. However, Andrea wants to purchase a new more expensive model, which costs $12,000.
Upon review, NDIA does not consider the additional cost of $4,000 for the newer model to be reasonable or necessary. However, Andrea decides to proceed with the more expensive purchase, and pays for the newer model using $4,000 from her own savings.
Outcome: Andrea is not entitled to the NMETO for $8,000 of the purchase price of her prosthetic limb because it is an amount that she is paid for the medical expense by government. However, because Andrea paid for the remaining $4,000 out of her personal savings, and it is an eligible medical expense, she may be able to claim the NMETO for this amount.
C. Participants who engage care providers – employer obligations
If a participant engages an attendant carer or a support person directly under a self-management plan, depending on the nature of the arrangement (volunteer, employee, or independent contractor), they may be required to undertake the responsibilities that an employer has, such as withholding amounts under the pay-as-you-go (PAYG) withholding system.
(ii) Representatives of participants
The income tax treatment for an NDIS amount received by a representative of a participant depends on the capacity in which they receive that amount. The various capacities are outlined below:
A. Nominated representative
For a representative (such as a nominee, parent or guardian) nominated to manage a participant’s plan, an NDIS amount received:
- on behalf of the participant as their agent or trustee is not ordinary income in their hands
- for their own benefit for services they will or have provided to the participant under an arrangement with the participant may be assessable in their hands as ordinary income.
The case study below explains the income tax treatment of an NDIS amount if it is received by a guardian on behalf of a participant:
Case study: Sam is a participant under the NDIS who requires carer support as part of his plan. Sam has elected for the NDIA to pay $10,000 as per his plan directly to his guardian who will then use the entire NDIS amount to pay his care provider.
Outcome: Sam’s guardian will not have to pay income tax on this $10,000 payment as it is received in the capacity of an agent/trustee.
B. Registered plan management provider (RPMP)
If, as an RPMP, a participant’s NDIS amount is received:
- as an agent/trustee, it is not received by an RPMP as payment for any services it provides so the amount will not be ordinary income in its hands
- as payment for any services it provides, it may be assessable as ordinary income.
The case study below describes the income tax treatment of an NDIS amount if received by an RPMP on behalf of a participant.
Case study: Fabio is an NDIS participant who has arranged for an RPMP to manage his funding on his behalf. Under his plan, $5,000 is allocated for the purchase of a prosthetic limb and care services. The $5,000 is deposited into Fabio’s RPMP’s nominated trust account. Fabio’s RPMP then appropriates for its own benefit $400 from the $5,000 deposited into the trust account for the care services and uses the balance ($4,600) to purchase Fabio’s prosthetic limb.
Outcome: The $5,000 deposited into the RPMP’s trust account is not income of the RPMP as it was received in the capacity of an agent/trustee. However, once the RPMP becomes entitled to its fee of $400, that fee is assessable income as it is a commercial provider.
A representative that purchases equipment or services on behalf of a participant using the participant’s NDIS amounts is not entitled to:
- a deduction for the purchase price of that equipment or service, and
- a depreciation deduction for that equipment.
However, the case study below – an extrapolation of Fabio’s situation above – highlights exceptions:
Case study: Fabio’s RPMP used the $400 it appropriated to cover its fees to pay the wages of its employees who provide services to participants, including Fabio.
Outcome: As the RPMP is a commercial provider that is not exempt from income tax, it is entitled to a deduction for the wages it has paid using the $400 it has appropriated to cover its fees.
Similarly, if an RPMP incurs expenses or purchases assets on its own account, it should treat those expenses and assets in its accounts for accounting purposes in the way it normally would.
Consult this office to find out more about the GST and income tax implications in respect of the NDIS.
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