The National Disability Insurance Scheme (NDIS) has created opportunities for property investors to generate rental income while contributing to social good. Investing in property involves tax considerations, so choosing the right tax structure — direct property ownership, self-managed super funds (SMSFs), trusts, or companies — can significantly impact your tax liabilities and benefits. This article explores these structures and their implications for NDIS property investments.
Direct Property Ownership
Direct property ownership simply means owning an NDIS property directly in your name. Any income generated through this investment is taxed at the individual’s marginal tax rate. Here are the tax implications to consider:
Advantages:
- Capital Gains Tax (CGT) Discount: Individuals can access a 50% CGT discount if the property is held for more than 12 months. For example, consider a property that is sold after one year, making a $100,000 profit. A Marginal tax rate of 37% would result in a tax liability of $37,000. However, the 50% CGT discount revises the tax liability down to $18,500 — a 50% discount.
- Negative Gearing: Negative gearing occurs when the property expenses are higher than the income, resulting in a loss. Losses from rental property may offset other taxable income, reducing the overall tax bill. It’s important to note that SDA investment properties typically generate positive cash flow, so negative gearing may not be a suitable strategy.
- Depreciation Benefits: Investors can claim deductions for property depreciation and other eligible expenses. The building and equipment costs associated with SDA property is generally higher than regular residential homes, meaning you might be eligible for higher depreciation deductions.
Challenges:
- Higher Marginal Tax Rates: Rental income is added to your personal income and taxed at your marginal rate. For high income earners, the marginal tax rate could be as high as 45% (plus 2% Medicare Levy). In scenarios like this, it’s worth speaking to a tax professional or financial adviser to determine if there is a more appropriate tax structure to use.
Self-Managed Super Funds (SMSFs)
SMSFs may be a tax-efficient way to invest in NDIS properties, particularly for retirement-focused investors.
Advantages:
- Lower Tax Rates: Rental income and capital gains are taxed at 15% in the accumulation phase and potentially 0% in the pension phase.
- CGT Tax Discount: Due to the concessional tax rate of 15% inside the SMSF environment, the 50% CGT discount does not apply. However, for SMSFs holding an asset over 12 months, the CGT discount is one third — essentially meaning the capital gain is taxed at 10%. For a capital gain of $100,000, the SMSF would have a $10,000 tax liability.
- Depreciation Benefits: SMSFs can also claim depreciation, enhancing tax efficiency.
Challenges:
- Complex Regulations: Investing through an SMSF requires adherence to strict rules, so professional advice is highly recommended.
- Setup and Maintenance Costs: Establishing and maintaining an SMSF involves higher costs compared to personal ownership.
Trust Structures
A trust may be effective for investors seeking flexibility in income distribution and asset protection.
Advantages:
- Income Distribution: Rental income and capital gains can be distributed among beneficiaries, potentially lowering the overall tax burden.
- Asset Protection: Properties held in trusts are protected from personal liabilities.
- Flexibility: Trusts provide more control over estate planning and income allocation.
Challenges:
- No CGT Discount for Companies in the Trust: If income is distributed to a company, CGT discounts are not available.
- Higher Compliance Costs: Trust structures involve setup and ongoing administrative expenses.
- Non-negative Gearing: Losses cannot offset the trustee’s personal income but may carry forward within the trust.
Company Ownership
A company structure is suitable for investors who prioritise liability protection and long-term scalability.
Advantages:
- Fixed Tax Rate: Companies are taxed at a flat rate of 30% or 25% for eligible companies, which may be beneficial for high-income earners.
- Liability Protection: Properties owned by a company are separate from personal assets, reducing risk exposure.
- Tax-deferred Growth: Companies can retain profits for reinvestment without immediate distribution to shareholders. This is in contrast to a trust that must distribute income to beneficiaries or the retained profit is taxed at the highest marginal tax rate.
Challenges:
- No CGT Discount: Companies are not eligible for the 50% CGT discount.
- Dividend Taxation: Profits distributed as dividends are taxed in the hands of shareholders. However, tax credits from franked dividends help to ensure there is no double taxation.
Considerations for NDIS Property Investors
When choosing a tax structure, it’s crucial to consider:
- Income Levels: High-income earners may benefit from structures that allow income splitting or fixed tax rates.
- Investment Goals: Are you focused on short-term cash flow, long-term capital gains, or retirement planning?
- Risk Protection: Structures like trusts and companies provide liability protection, which may be vital for risk-averse investors.
- Compliance Requirements: Some structures, such as SMSFs, companies and trusts, require rigorous compliance and higher administrative costs.
- Finance: Many property investors require a mortgage to purchase an investment property. There are tax deductions available for loans for investment purposes, and depending on the tax structure of the purchasing entity, the type of loan may differ — for example, an individual would use a mortgage for an SDA property while an SMSF would need a limited recourse borrowing arrangement. It’s important to speak to an NDIS loan expert — like us!
Regardless of what type of property you’re considering investing in, tax considerations are complex and vary significantly depending on the ownership structure. To maximise your tax benefits and ensure compliance with relevant laws, consult a tax advisor or financial planner. By tailoring your tax strategy to your personal circumstances and investment objectives, you can make the most of this unique opportunity.
For more information on purchasing an SDA property, please get in touch with us.
