How the NDIS affects tax: Understanding the Scheme and Tax Obligations
When participating in the National Disability Insurance Scheme (NDIS), it’s important to understand how it affects your taxes. Many Australians ask, “how does the NDIS affect tax?” Whether you’re a participant, a support worker, or managing someone else’s plan, knowing the tax rules helps avoid problems later.
If you’re a participant, the payments you receive from the NDIS are generally considered exempt income. However, if you earn income using NDIS-funded assets, or if you work as a support provider, different tax rules may apply.
Understanding how the NDIS affects your tax can make managing your finances much smoother.
Hiring a Support Worker Under the NDIS
When you self-manage your NDIS funding, you can hire your own support workers. If you do, you may have obligations depending on whether your worker is an employee or a contractor:
- Employee: You must withhold tax and pay superannuation.
- Contractor: Generally, you don’t need to withhold tax unless you both agree otherwise.
Checking the worker’s status is critical. You can use the ATO’s employee or contractor decision tool. If you do need to withhold tax, make sure you:
- Register for a PAYG withholding account.
- Use ATO calculators to work out how much tax to withhold.
Hiring support workers can be rewarding, but following the correct tax rules is essential.
Example: NDIS Self-Management in Action
Brian self-manages a $30,000 NDIS budget. He directly engages support providers and pays them after receiving reimbursement. The $30,000 he receives is exempt from income tax. However, because he hires workers himself, Brian needs to check whether they are employees or contractors to manage any withholding or superannuation requirements correctly.
This example highlights why understanding how the NDIS affects your tax is so important if you self-manage.
Tax Responsibilities for Support Workers
If you work as a support worker, any payments you receive for providing services under the NDIS are part of your taxable income. Whether you work in your own home or at a client’s residence, you must declare this income.
Support workers may claim deductions for expenses related to their work. However:
- Expenses reimbursed by the NDIS can’t be claimed.
- Only costs directly linked to earning income are deductible.
Maintaining good records makes it easier to claim what you’re entitled to at tax time.
Tax Considerations for Participants
As a participant, the money you receive through the NDIS is exempt from tax. However, this doesn’t mean you can automatically claim deductions for expenses related to your disability.
Participants:
- Cannot claim deductions for NDIS-funded purchases.
- Cannot claim depreciation (decline in value) on assets bought with NDIS funds.
If you use an NDIS-funded asset to generate income, such as renting out a modified room, that income is taxable. In that case, the asset’s modification cost may also impact your capital gains tax (CGT) position if you later sell the property.
Income and Deductions for Nominated Representatives
If you’re a parent, guardian, or nominee managing an NDIS plan:
- NDIS funding received on behalf of a participant is non-assessable income.
- If you provide services personally and are paid, that payment is your assessable income.
Purchases made on behalf of a participant are not deductible, and equipment bought using NDIS funds doesn’t attract a depreciation deduction either.
Careful record-keeping is important to separate personal income from participant funding.
Registered Plan Management Providers (RPMPs) and Tax
Registered Plan Management Providers who manage NDIS plans must also know their tax obligations:
- Funds received on behalf of participants are non-assessable for the participant.
- Fees earned by the provider for services are assessable income.
If the RPMP itself qualifies for tax exemption under Division 50 of the Income Tax Assessment Act 1997, some fees might be tax-exempt. However, normal business rules usually apply to income earned for providing services.
Again, expenses paid using NDIS funds to benefit participants are not deductible, but expenses that relate directly to the RPMP’s business income are.
Example: Plan Management Services
Alex has a $70,000 NDIS budget managed by a company called Disability Plus. They pay service providers on Alex’s behalf. The $70,000 is not taxable income for Alex.
However, Disability Plus earns $10,000 from providing therapy and $1,200 from plan management fees. This income is taxable business income for Disability Plus, not for Alex.
Plan management providers must keep detailed records of how participant funds are spent and how income is earned.
Practical Tips to Manage Your NDIS Tax Position
Here are a few quick tips to help participants, support workers, and providers stay on top of tax matters:
- Confirm worker status early: If you hire support workers, check if they’re employees or contractors.
- Keep detailed records: Save invoices, receipts, and service agreements.
- Report income correctly: Declare all income earned through providing NDIS services.
- Be cautious with deductions: Only claim deductions you’re entitled to under ATO rules.
- Seek advice: Complex situations, like using modified assets to earn income, may need expert help.
Being proactive about your tax responsibilities helps avoid surprises at tax time.
How Does the NDIS Affect My Tax?
Understanding how the NDIS affects tax is vital whether you’re a participant, support worker, nominee, or provider. Every dollar received and spent needs careful attention to stay compliant.
If you need help navigating how the NDIS affects your tax, contact the team at Cotchy today. We can help you simplify your obligations, avoid penalties, and keep your records in perfect order.
Source: ATO