In 1971, law costs clerk Ann Margaret Lodge tried to claim the $647 she paid in childcare fees in her annual tax return.
The single mother worked from home and while she’d hoped to juggle the demands of her work with looking after her baby daughter Deborah, this proved difficult and she needed the support of childcare to earn sufficient income to support them both.
The ATO rejected Miss Lodge’s deduction, so she boldly took her claim to the High Court who also dismissed her appeal on the grounds that her childcare expenses were ‘neither relevant nor incidental’ to her work.
Incredibly, more than fifty years on, Lodge v Federal Commissioner of Taxation remains the legal precedent that denies working parents the right to claim their childcare expenses, but new research from Monash University says that to boost women’s workforce participation and give women a fairer go, it is time to take another look at whether childcare expenses should be tax deductible.
“COVID-19 has shown us how essential childcare is for a person’s income earning capacity, particularly women, and the blanket characterisation of childcare as personal or domestic isn’t reflective of a contemporary view,” says Amanda Selvarajah, PhD candidate and lecturer with Monash Business School’s Department of Business Law and Taxation.
“The Lodge case set the benchmark for how childcare expenses are treated so whenever the question of claiming childcare as a tax deduction comes up, people quote the High Court ruling and say it’s case closed,” Amanda explains, “but it’s time to take another look because a lot has changed for families and society over the last 50 years.”
According to the Australian Bureau of Statistics, caring for children remains the largest barrier to female participation in the labour force, and Australia ranks behind countries such as the United States and UK when it comes to the rates of women in full time work.
Making childcare more affordable is one of the single best measures the Federal Government could do to increase women’s workforce participation.
Labelled the ‘motherhood penalty’ Australian women’s full-time workforce participation has hardly changed in 40 years and one of the reasons is the high cost of childcare, despite significant investments from the former Coalition government and the current Albanese government who have both increased subsidies over recent years.
Childcare costs can vary depending on the amount of care a family uses, the number of children they have in care, the hourly or daily rate charged by the provider and the amount of government subsidies the family qualifies for, but according to the Grattan Institute the average cost for long day care, which is what most families use, is $105 per day.
“Fundamentally, it’s the principle that no one should be punished for having a child. For too long we have heard women saying ‘I love my job and I don’t want to have a big gap in my career but it doesn’t make financial sense for me to work full-time’,” says Monash University’s Amanda Selvajarah who co-authored the paper with her mother, Dr Lydia Thiagarajah.
“In some families it is more costly for women to work full-time than to stay home, which is contrary to how we want to be structuring our economy. It’s really important that we acknowledge the reality that for many parents to work, they have to incur childcare expenses and that should be deductible.”
The idea of making childcare tax deductible has been hotly debated in the past but dismissed because it was perceived to only benefit middle and higher income earners. However, the researchers recommend that tax deductibility be considered in conjunction with subsidies that support women on low incomes.
“The main road block to this getting support previously is that it was looked at as a policy solution on its own when it needs to be looked at in concert with other measures such as subsidies. Some implied that a deduction would only benefit those with ‘gold plated nannies’ and that a deduction would be abused by people suddenly spending bucket loads on childcare just so they could claim it as a tax deduction, but that’s unrealistic. Parents choose the best childcare they can for their children and the notion that a parent will spend more just to bring down their tax liability is odd.”
The researchers are recommending that clear guidance be provided, specifying an acceptable deductable amount in the same way we currently treat home office expenses.
“Parliament has an opportunity now to step in and clarify childcare as a legitimate claimable tax deduction, to reduce the workforce disincentive for so many women and provide a fairer tax policy that recognises how central this expense is to earning and generating an income.
“It’s time we started that conversation again,” Amanda says.