Explanatory Memorandum
(Circulated by the authority of the Minister for Families, Community Services and Indigenous Affairs, Minister for Disability Reform, the Hon Jenny Macklin MP)Schedule 3 - Income tax amendments
Summary
This Schedule amends the Income Tax Assessment Act 1997 to ensure that payments and benefits provided under the NDIS to an NDIS participant are exempt from income tax and that deductions and depreciation of capital assets and certain other capital expenditure systems do not apply in relation to the expenditure of those exempt NDIS amounts, leading to a double tax benefit being obtained.
Abbreviations used in the explanatory memorandum for this Schedule
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- CGT means capital gains tax
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- ITAA 1997 means the Income Tax Assessment Act 1997
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- NMETO means net medical expenses tax offset
Background
The NDIS presumes that a person has the individual agency and the capacity to act in their own interests unless critical circumstances prove otherwise, and that there is no one-size-fits-all approach to the management of a participant's plan.
Delivering a framework that gives effect to these presumptions, while also giving people choice regarding how supports and services are to be provided under the NDIS to NDIS participants, may give rise to unintended income taxation consequences.
While, in most circumstances, payments and benefits provided under the NDIS would not be considered assessable income, providing the flexibility to enable an NDIS participant to self-manage their plan, under which they may receive a payment in place of receiving particular services, may result in circumstances in which such payments and benefits may be considered to be either ordinary or statutory income, depending on the nature of the benefit and the way that it is made.
As this raises ambiguity about the circumstances in which NDIS payments and benefits may be considered to be assessable income, this Bill seeks to address this uncertainty, by specifically outlining the tax treatment of NDIS amounts, including the circumstances in which NDIS payments and benefits are to be exempted from income tax.
This Schedule also seeks to achieve the following related objectives:
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- it restricts the ability to claim a deduction in respect to the spending of an exempt NDIS amount;
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- it reduces the 'cost' for depreciation of capital assets or other capital expenditure to the extent that the asset is purchased using exempt NDIS amounts; and
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- it reduces the cost base of CGT assets to the extent that the asset is purchased using exempt NDIS amounts.
The amendments made by this Schedule commence on the day that the Bill receives the Royal Assent, and apply to assessments for the 2013-14 income year and later income years.
Explanation of the changes
Making an NDIS amount exempt from income tax
Depending on an NDIS participant's circumstances and the way that an NDIS amount is paid to the participant, there are some circumstances in which the NDIS amount may be considered to be ordinary or statutory income under the ITAA 1997. This would mean that NDIS participants could need to pay income tax on NDIS amounts they receive.
Ordinary and statutory income can be made exempt from income tax if it is exempted under the ITAA 1997 or another Commonwealth law (section 6-20 of the ITAA 1997). Exempt income is not included as assessable income when calculating taxable income.
Item 5 amends Subdivision 52-H of the ITAA 1997 to provide an exemption from income tax for an NDIS participant (as defined in the NDIS Act) in respect to an NDIS amount (as defined in the NDIS Act) that is derived (directly or indirectly) under the NDIS Act either from the Agency (DisabilityCare Australia) or another entity authorised to provide that benefit to the NDIS participant under the NDIS Act.
The exemption will apply to NDIS amounts paid directly to the NDIS participant (or a nominee of the participant), by DisabilityCare Australia, or benefits that are provided to the NDIS participant indirectly, by third parties (including service providers and registered plan management providers), funded under the NDIS Act.
Subsection 6-5(4) of the ITAA 1997 will operate so that, where a payment is made on behalf of an NDIS participant (for example, by DisabilityCare Australia to a third party service provider to the NDIS participant), then the payment will be taken to have been derived by the participant. Therefore, the exemption will ensure that the derived payment is exempt in the hands of the NDIS participant.
Example 1
Manuel is an NDIS participant and, as part of his plan, he is to be provided with carer support. As DisabilityCare Australia is able to get a better rate for NDIS participants by contracting directly with care providers, Manuel has elected in his plan for the Agency (DisabilityCare Australia) to pay Manuel's NDIS amount directly to the care provider.
In this situation, assuming that the NDIS amount was assessable income, the payment to the care provider would be considered to be derived by Manuel, and the income tax exemption would apply to that amount so that Manuel would not be assessed on that amount.
Intermediaries or other entities that are authorised to receive payments in respect of an NDIS participant may be assessed on that income according to the ordinary operation of the income tax law, and the NDIS income tax exemption will not extend to those entities. Where an intermediary is contracted to provide supports to a participant under the NDIS Act, the NDIS amounts received would be a normal business receipt and assessable income in their hands.
Example 2
As in Example 1 above, the NDIS amount paid to the commercial care provider would be assessable in the hands of the care provider. The tax exemption would only apply to Manuel to the extent that the NDIS amount is otherwise assessable.
Note: If the care provider was a registered charity and was an exempt entity themselves (under another section of the ITAA 1997), then it may be exempt in the hands of the care provider as well.
Item 1 is a consequential amendment for the income tax exemption in item 5, and amends section 11-15 of the ITAA 1997 to include NDIS amounts in the checklist of ordinary or statutory income which is exempt only if it is derived by certain entities.
Limiting eligibility for deductions and offsets in respect to an exempt NDIS amount
A taxpayer may deduct a loss or outgoing from their assessable income under Division 8 of the ITAA 1997 to the extent that it is incurred in the gaining or producing of assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
However, a taxpayer cannot deduct a loss or outgoing to the extent that it is capital in nature, is of a private or domestic nature or is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income.
The ITAA 1997 also has specific provisions that allow or deny deductions in particular instances.
Item 3 amends Division 26 of the ITAA 1997 to provide that an NDIS participant will not be able to claim a deduction for a loss or outgoing to the extent that the loss or outgoing is funded (including funded by way of reimbursement) by an NDIS amount the participant derives.
This means that a deduction will only continue to be available to the extent that the exempt NDIS amount is less than the loss or outgoing incurred.
Example 3
Fred is an NDIS participant, and is employed as an academic in a very specific and technical engineering field. Under Fred's NDIS plan, he is to be provided with annual updates to his voice recognition software, and is given an NDIS amount of $200 to purchase the update software.
When Fred gets to the software provider, he finds that there are custom update products which would be good to use for developing his technical lectures. Based on this preference, he then contracts with the provider to develop custom update software built around recognition of technical engineering jargon. However, this custom update software costs $300.
In this hypothetical example, it is taken that DisabilityCare Australia does not consider the additional cost for the custom update software to be reasonable or necessary (based on Fred's particular circumstances) and therefore does not agree to change Fred's plan to fund the extra amount.
Fred uses $100 of his savings, on top of the $200 from DisabilityCare Australia, to purchase the custom update software.
In this case, item 3 will operate so that Fred is unable to get a deduction for the $200 as it is an exempt NDIS amount (and he is not, in substance, 'out of pocket' in respect of that amount), but he is able to get a deduction for the $100.Example 4
Continuing on from Example 3, in addition to the $200 that Fred receives to purchase annual voice recognition software updates under his NDIS plan, he is also paid $400 in respect of equipment maintenance and $200 in respect of funding for personal care services. He is thus paid $800 in total under his NDIS plan.
In working out the extent to which the voice recognition software, equipment maintenance and the personal care services are funded by his NDIS amount, it is necessary to have reference to Fred's NDIS plan and any variation that may subsequently be made to it.
If the maintenance of his equipment actually cost $450 and his funding for personal care services was only $150, having regard to Fred's plan, it would be said that the voice recognition software was funded to the extent of $200, the equipment maintenance was funded to the extent of $400 and the personal care services were entirely funded by Fred's NDIS amount.
Item 2 is a consequential amendment relating to item 3, and amends section 12-5 of the ITAA 1997 to include the deduction limitation for NDIS amounts in a checklist of particular kinds of deductions and limits on deductions.
Interaction with the net medical expenses tax offset
The amendments in this Schedule are consistent with the existing operation of the NMETO.
Taxpayers are eligible to claim the NMETO for certain rebateable medical expense amounts (which is defined in the Income Tax Assessment Act 1936 ), less any amount which the taxpayer is entitled to be paid in respect of those medical expenses by a government or public authority.
Similarly to the operation of the amendment made by item 3, the NMETO will only be available (in this context) to the extent that the expenditure is a 'medical expense' (as per the requirements for the NMETO) and it is not subsidised by or reimbursed from an NDIS amount, which would be considered an amount from a government or public authority.
Example 5
Emmalee is an NDIS participant and, under her plan, is to be paid an NDIS amount for a prosthetic limb (which is a 'medical expense' for the purposes of NMETO). The NDIS amount she receives is $8,500. However, the expenses for the prosthetic limb are higher than the plan allows for as Emmalee decides that she wants to choose a more expensive option, which costs $11,000.
In this hypothetical example, DisabilityCare Australia decides that the additional cost of $2,500 is not reasonable or necessary in Emmalee's particular circumstances, and does not approve the additional cost of $2,500 as part of the plan.
Emmalee decides to proceed with the more expensive purchase, and pays using the $8,500 from the NDIS and $2,500 from her own savings.
Emmalee would not be entitled to the NMETO in respect of the $8,500 of the purchase price of her prosthetic limb because it is an amount which she is entitled to be paid in respect of that medical expense by government or a public authority. However, the remaining $2,500 would be a rebateable medical expense amount under the NMETO as it is not an amount which she is entitled to be paid in respect of her prosthetic limb by a government or public authority and is instead a private expenditure.
Reducing the 'cost' of a depreciating asset or other capital expenditure in respect to an exempt NDIS amount
A taxpayer may deduct an amount equal to the decline in value of a depreciating asset that they hold for a taxable purpose over the effective life of the asset under Division 40 of the ITAA 1997.
The decline in value is measured against the effective life of the asset, and the starting amount is determined by the 'cost' of the asset. The 'cost' is determined under Subdivision 40-C of the ITAA 1997, and generally involves two elements - the cost when an asset begins to be held, and additions to the cost after starting to hold the asset.
Item 4 amends Subdivision 40-C of the ITAA 1997 to include a new provision in Division 40 of the ITAA 1997 (regarding the calculation of cost for depreciating assets) that reduces the 'cost' of a depreciating asset to the extent the spending of the exempt NDIS amount would be denied as a deduction under the amendment in item 3.
This means that the 'cost' of the depreciating asset purchased will then exclude the equivalent exempt NDIS amount and be calculated in accordance with the existing rules in Division 40 of the ITAA 1997.
The effect of this will be that, where an NDIS participant has been given an NDIS amount to purchase a particular product (for example, a wheelchair), the NDIS participant will not be able to add that exempt NDIS amount to the cost of a depreciating asset and therefore claim depreciation/capital allowances for an amount for which they have not had to pay tax on.
This may also cover the situation where an NDIS participant also adds some of their own (non-NDIS) income to the NDIS amount to purchase a superior model than allocated in the NDIS plan.
Example 6
Carla is an NDIS participant and, under her NDIS plan, she is to be provided with a support that is a depreciating asset (with an effective life of four years) and is given an NDIS amount of $50,000 to purchase the support.
When Carla goes to purchase her support, she finds another product which she has a preference for and can be used for her employment. However, her preferred support is $80,000.
In this hypothetical example, DisabilityCare Australia decides that the additional cost of $30,000 is not reasonable or necessary in Carla's particular circumstances, and does not approve the additional cost of $30,000 as part of the plan.
In any case, Carla uses $30,000 of her savings, on top of the $50,000 from DisabilityCare Australia to purchase the support.
In this case, the provision operates so that Carla must exclude the $50,000 from the cost of the depreciating asset as it is an exempt NDIS amount already excluded from the tax system. However, she is able to add the $30,000 she has contributed to the cost of the depreciating asset and then claim depreciation in accordance with Division 40 of the ITAA 1997.
Reducing cost base of CGT assets in respect to an exempt NDIS amount
A taxpayer can make a capital gain or capital loss on an asset when a CGT event happens to that asset (for example, if the asset is disposed of). To work out the capital gain or loss, the taxpayer first needs to know the cost base of the asset (which is the starting cost), and then consider capital proceeds or losses arising from the CGT event.
The cost base of an asset (for CGT purposes) generally consists of five elements, listed in section 110-25 of the ITAA 1997. They are:
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- 1st element - acquisition costs;
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- 2nd element - incidental costs (for example, transaction costs);
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- 3rd element - costs of owning the asset (for example, costs of maintaining or repairing the asset);
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- 4th element - capital expenditure incurred to increase or preserve the asset's value, or that relates to installing or moving the asset; and
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- 5th element - capital expenditure incurred to establish, preserve or defend the title to the asset or a right over the asset.
Exclusions from cost base are listed in section 110-38 of the ITAA 1997, while exclusions from reduced cost base are listed in subsections 110-55(4) to 110-55(9F) of the ITAA 1997.
Item 6 amends section 110-38 of the ITAA 1997 to add new subsection 110-38(7) of the ITAA 1997, to provide that expenditure of NDIS amounts does not form any part of any element of the cost base to the extent that section 26-100 prevents it being deducted (even if some other provision also prevents it being deducted).
That is, like item 4, it reduces the cost base of a CGT asset to the extent that the purchase was funded by an exempt NDIS amount and would be denied as a deduction under the amendment in item 3. This applies even if the exempt NDIS amount is derived after the asset is acquired.
Item 7 amends section 110-55 of the ITAA 1997 to insert new subsection 110-55(9G) of the ITAA 1997 in exactly the same way as item 6, except that it applies to the reduced cost base of the asset. Definitions
Item 8 amends subsection 995-1(1) of the ITAA 1997 to insert a definition of NDIS amount , to provide that this term has the same meaning given by the NDIS Act.
Application provisions
Item 9 specifies that these amendments will apply to assessments with respect to the 2013-14 and later years of income.