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.


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