Knowledge bank: CPA experts unpick the issues surrounding the deductibility of childcare.
Q. Should childcare expenses be tax deductible?
A: Under current law, childcare expenses cannot be claimed as a work-related deduction, since they are either not considered to be necessarily incurred in earning assessable income and/or they are of a private or domestic expense.
A fringe benefits tax (FBT) exemption is available when childcare facilities are located on an employer's business premises. Employees able to take advantage of this concession can salary-sacrifice their childcare expenses. But it appears access to this exemption is effectively limited to employees of large Australian companies, government departments and universities.
The upshot of this is that the bulk of childcare assistance provided by the Commonwealth is via the childcare benefit and the 30 per cent tax rebate on eligible parents' net out-of-pocket expenses on childcare, provided these are spent at an approved childcare facility.
While childcare assistance is below the level available in other OECD countries, assistance to families overall (via such measures as family tax benefits, baby bonuses and parenting payments to lower-income earners) appears to be significantly higher than in comparable jurisdictions.
In this light, a recent report by a federal parliamentary committee on balancing work and family recommends that FBT be removed from all childcare to enable more employees to salary-sacrifice their childcare costs. Since this approach would be equivalent to allowing a tax deduction for childcare costs, the report also proposes that families have the option of a deduction, or alternatively to continue using the existing assistance under the childcare benefit and tax rebate schemes, if this is more advantageous for them.
Other changes mooted in the report include an extension of current childcare assistance for all types of childcare including for in-home carers (nannies). The committee says that it hopes to see a professional in-home sector develop to take the pressure off childcare centres and give parents more choice in arranging work and family life.
Modelling by Access Economics for the committee also found that if there were no further increases to women's workforce participation, or even if increases are limited to part-time participation, then we are going to see Budget shortfalls even greater than those predicted in the 2002 intergenerational report.
But the committee was not unanimous, as some members raised the following concerns:
Lack of fairness if a deduction approach provided disproportionate benefits to higher-income earners, particularly via extension of assistance for in-home care
Restriction of in-home care assistance to certain categories of workers such as shift workers, those with a child who has significant disabilities, and workers in remote areas
Failure to address problems in the childcare industry, including the role of community-run centres (that is, not-for-profit centres)
Lack of recognition of the wider benefits of a comprehensive childcare system, such as in reducing inequality and disadvantage
It will be of interest to see whether the government picks up any of the committee's recommendations in its 2007/08 Budget. And while the prime minister recently thanked the committee for its report, he noted there may be a number of reasons why Australia's worker participation rate is different, including matters other than childcare. In this context, he referred to the high level of income and family wealth in Australia as a factor that could give women with young children more choice as to whether they stay at home or join the workforce.
