Improving access to child care through the tax system

The Productivity Commission recently released its interim report
into child care and early childhood learning.

The Tax Institute contributed
to the Commission’s inquiry earlier this year and argued that two options for
improving access to child care through the tax system would be to allow a tax
deduction for child care costs and to use a refundable tax credit or cash
grant.

Tax deductions for the costs of child care, if appropriately
targeted, would encourage highly educated women who bear the primary
responsibility for domestic duties to return to work.

Tax deductions
should only be available to reduce the tax on income from employment or
self-conducted business income so that they are unequivocally tied to enhancing
productivity. That is, there is no point giving a subsidy to reduce the
tax on investment income. As such, we do not support subsidising the
child care expenses of a parent who is still at home earning bank interest or
share dividends.

The advantage of making child care costs tax deductible is that
it relies on market forces (rather than Government intervention) to determine
work force participation and to allow legitimate costs of work force
participation to be appropriately deducted from income.
Tax deductibility
would assist in eliminating existing incentives for primary carers to stay out
of the workforce, yielding a variety of benefits for individual families as
well as the nation.

Tax deductibility of child care costs therefore deserves careful
consideration and study. We accept that any such scheme would need to be
supplemented with means-tested payments, to ensure that women in lower marginal
tax brackets who cannot benefit as greatly from deductibility of child care are
also appropriately supported.

However, this assistance should be in addition
to a wider consideration of deductibility of child care costs. Of course, reducing costs is only half the battle. Availability
of childcare places and workplace flexibility allowing part-time employment are
also key factors.

But if we can make the tax system better recognise the true
income-dependent nature of child care costs, we’ll take a significant step in
the right direction.

Robert

Jeremenko

Robert Jeremenko CTA is Senior Tax Counsel of The Tax Institute.

The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.