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Expand deductibility for education expenses – Unequivocal yes, subject to a few caveats

We are supportive of initiatives that encourage individuals to continue upgrading their human capital skills over their working life. In an ever-changing labour market, few expect a job for life, and it will be more likely that individuals will have multiple careers over their lifetime.

Expand deductibility for education expenses – Unequivocal yes, subject to a few caveats
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  • Tony Greco
  • May 20, 2021
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The increased rate of globalisation and technological change are other drivers that are contributing to the need for continued upgrading of skills. We take the position that investing in oneself is just as important as investing in physical capital.

Our current tax settings do not support or encourage retraining and reskilling once an individual has commenced earning an income in their chosen field. We believe that the tax system can play a greater role in encouraging individuals to retrain and reskill to support their future employment and career.

There are a number of significant existing support mechanisms for higher education and retraining. We see the proposal to expanding education deductions for individuals as adding to the current support for higher education, while addressing a void in the existing arrangements for individuals who are currently earning an income and may be unable to access any of the existing support initiatives. For this cohort, the existing tax arrangements represent a deterrent to reskilling.

Should the tax system play a greater role to encourage the retraining and reskilling of individuals is the question being asked. The existing requirement for a tax deduction is limited to expenses in gaining or producing assessable income.

This limits deductions to an individual’s current employment activities that either maintains or improves the specific skills required for that employment or leads to an increased income in the individual’s current employment.

Education expenses that do not have a sufficient connection to an individual’s current employment are therefore not deductible.

We see this proposal working hand in hand with one of the other 2020-21 federal budget announcements, namely, the exemption for FBT employer-provided education.

The government intends to exempt from FBT, employer-provided retraining and reskilling benefits to redundant, or soon to be redundant, employees where the benefit may not relate to their current employment.

This allows the employer to bear the cost of retraining and reskilling without incurring FBT. Without this FBT amendment, education expenses not related to an individual’s current employment would be liable for FBT.

To provide equity to individuals who do have employer support for reskilling or retraining, this proposal is important, to extend a similar tax concession to individuals who undertake further education costs themselves, by dipping into their own pockets.

The benefit to an individual of incurring the cost themselves will, however, be dependent on the individual’s marginal tax rate. Those on higher incomes will receive a greater benefit but this is no different to any other eligible deduction. 

There are wellbeing and economic benefits that quality education skills provide, which generally outweigh the cost of providing further support. There is a strong business case for providing additional support especially if it is directed to areas where there is a skills shortage. The IPA Deakin research partnership published the inaugural Small Business White Paper in 2015.

A whole chapter has been devoted to skills and human capital. Human capital is the fundamental driver of productivity and hence our in-principal support to this proposal. There are strong linkages between education and entrepreneurial activity, particularly for the small business sector and the wider economy. 

The economy has been savaged by the financial impacts of COVID and we are supportive of initiatives that are aimed at improving our productive capacity.

The recent federal budget has put in place sizeable tax incentives for replacing physical capital. We see this proposal, in conjunction with wage subsidies such as the JobMaker Hiring Credit, JobTrainer (extra funding for free or low fee extra training places) and Apprenticeship Wage Subsidy as providing further support to human capital. There are many skilled individuals who have been displaced and can be easily re-deployed into other less affected sectors with retraining.

The proposal also bodes well for individuals who wish to continue to work but for a number of reasons may not be able to do so (i.e. physical limitations, age, mental burnout), and need to reskill to remain in the workplace by pursuing a new career. There are a lot of occupations where the physical demands of the job cannot be sustained beyond a certain age, and therefore retraining offers an opportunity to extend an individual’s working life. This is particularly relevant if we are looking at stemming the tsunami of Baby Boomers approaching retirement in the near future.

With international border restrictions, overseas immigration of skilled labour will be significantly curtailed. We need to look at ways to add to the supply side of the labour market and this proposal can contribute to adding capacity where it is needed, if the tax concession is appropriately targeted.

‘The $250 reduction in expenses for self-education be removed’

Self-education expenses are broken into five categories. If all of your self-education expenses are ‘category A’ items, then you have to reduce your deduction by $250. However, ‘category E’ expenses can be used to offset the $250. Examples of category E expenses include:

  •  
    childcare while attending self-education activities;
  •  
    capital expenses related to your self-education such as the purchase of a desk; and
    • fares, travel or car expenses for these journeys: 
      for work-related self-education, the second leg of a trip if you went from home to your place of education and then to work, or the other way around.
    • if you receive a taxable bonded scholarship and are not employed by the scholarship provider, travel from home to your normal place of education and back.

Regardless of whether the government proceeds with this proposal, it is an opportunity to remove the current rule, which requires individuals to reduce their self-education deduction by $250.

The concept is outdated and does not serve any useful purpose. Most individuals allocate costs that are not deductible against this arbitrary threshold, so its removal eliminates some unnecessary compliance.

Existing support schemes – Higher education and VET (non-exhaustive summary)

The government provides considerable support for education. The tertiary education sector comprises higher education and vocational education and training. It includes public and private universities and non-university higher education providers (NUHEPs), and registered training organisations (RTOs), including private and community providers and state and territory government owned technical and further education (TAFE) institutes.

The government has bolstered its support to both the higher education and VET education sectors in its most recent federal budget as part of its economic response to COVID-19.

Higher education

Commonwealth Supported Places (CSP) are one of the key government funding programs that subsidise a proportion of the cost for a student to attend university.

In addition, the government provides the Higher Education Loan Program (HELP). The major category of loan under the HELP scheme, HECS-HELP, is available to students enrolled in CSPs, and covers most domestic undergraduate and some coursework postgraduate students studying at Australian universities.

Vocational education and training (VET)

Australia’s VET sector comprises over 4,000 RTOs, including TAFE institutes, private and community-based RTOs. RTOs deliver nationally recognised training, including both industry training and private courses accredited by VET regulators.

Australia’s VET system provides training for a wide range of workplace skills and knowledge-based competencies for a wide range of occupations, through a variety of training institutions and enterprises. See appendix A outlining support for Vocational Education and Training.

The government provides a number of other programs and assistance to assist with education and training.

Safeguarding the tax system – integrity measures required to minimise opportunities for tax misuse and abuse

Increasing the ability to claim deductions comes with a cost and therefore there needs to be integrity measures to ensure the proposal achieves good economic outcomes worthy of the tax concession.

Workplace deductions have been a huge problem and expanding deductions is like adding fuel to the fire. Under our self-assessment tax system, we need to ensure that we have the appropriate integrity measures in place to deal with individuals who try to over claim any entitlement.

We also need to ensure that individuals do not take advantage of the relaxation of the tax rules to engage in lifestyle or personal choice education courses that are effectively being subsidised by the taxpayer.

If this initiative is implemented, a shared risk approach with the individual who proposes to take advantage of the concession is warranted. One option is quarantining half the upfront deduction until the individual earns income from an activity associated with the retraining. This ensures that taxpayers do not wear the entire cost of education outlay in cases where the retraining does not result in the furtherance of a new activity. Quarantining is a pre-existing concept familiar to tax practitioners and currently applies to non-commercial losses.

Further, for occupations or vocations that are in short supply, should we allow the full cost to be deducted upfront?

Something similar in concept to the discontinued 457 visa system, where an occupations list that is updated to reflect industry needs can be maintained to facilitate the supply side of the labour market and to target the concession to where it may be most needed. Courses with vocational outcomes delivered by education and training providers registered with the appropriate regulatory bodies will be central to ensuring the integrity of the deductions. Supplemented by our existing substantiation rules to ensure appropriate documentary evidence is available to support the deduction, goes without saying.

In summary, we support in principle the proposal to extend deductions for education and training expenses, subject to appropriate integrity measures to ensure the policy objectives are achieved. Incentivising individuals to invest in themselves is generally a good thing, especially if it leads to enhancing the productive capacity of our economy.

While we acknowledge that the measure will add more complexity to the administration of tax deductions, if that is what it takes to encourage individuals to retrain and reskill, then, is it not just as worthy as any other eligible tax deduction?

In the meantime, we will need to wait and see where the government takes this proposal. 

Appendix A – Commonwealth funded VET

The table below details Commonwealth government concessions currently available for VET training – the top half of the table relates to programs specifically for unemployed and low-income earners

Commonwealth funded program

Brief description

Who it targets

JobTrainer

FREE OR LOW FEE - around 320,000 additional training places in skills need areas including health, aged care, disability care, IT and trades ($1 billion total in 2020-21 budget with $500 million Commonwealth input and equal co-contribution from states and territories).

Job seekers and young people including school leavers.

Adult Migrant English Program

FREE basic tuition in the English language.

Migrants and humanitarian visa entrants to Australia who are receiving a Centrelink payment.

Apprenticeships – Additional Identified Skills Shortage Payment

$1,000 to eligible apprentices at the 12 month point and $1,000 on completion of apprenticeship (taxable) – and only available for the ten identified occupations experiencing national skills shortages. Eligible employers also receive $2,000 at 12 month point and $2,000 when apprentice completes.

For those undertaking an apprenticeship (and their employers).

Apprenticeships - Trade Support Loans

Loans for eligible apprentices to assist with everyday costs during apprenticeships that lead to occupations on the Trade Support Loans Priority List. Up to $21,542 (lifetime limit in 2020-21) available over the apprenticeship and paid in instalments. Loan is repaid through the tax system once income is above the repayment threshold.

For those undertaking an apprenticeship.

Jobactive and other employment services programs

FREE access to fee-free VET courses and occupational licences. Also help with resumés, job applications, interview skills and job search.

Job seekers and those in minimal part-time work.

Skills for Education and Employment Program

FREE language, literacy and numeracy training.

Job seekers registered with a jobactive provider and receiving a Centrelink payment.

Boosting Apprenticeship Commencements

100,000 new apprenticeships/traineeships 50 per cent wage subsidy for employers who sign up new apprentices between 5 October 2020 and 30 September 2021 ($1.2 billion in 2020-21 budget, capped at $7,000 per quarter per apprentice/trainee).

Those wishing to undertake an apprenticeship.

Disability Employment Services

FREE formal training and licensing courses to help find employment.

For those with an injury, illness or disability registered with a DES provider.

Foundation Skills for Your Future

FREE – supports participants in the workplace by improving English language, literacy, numeracy and digital skills to meet current and future skills needs. ($52.5 million over four years, to 30 June 2023.)

Those over 15 years old, not at school, employed or recently unemployed (within past nine months), and not registered with an employment services provider.

Skills Checkpoint for Older Workers Program (linked to the DESE Skills and Training Incentive)

Up to $2,200 (incl. GST) to fund suitable training (accredited or non-accredited) for eligible participants with matching contribution by participant or their employer. (1 January 2019 to 30 June 2022 for up to 3,600 participants per year.)

For Australian citizens and permanent residents aged 45 to 70, who are employed and at risk of entering the income support system, or recently unemployed (within nine months) and not registered through an employment services program.

VET Student Loans (VSL)

VSL assists eligible students to pay tuition fees for approved diploma and above VET courses when studying with VSL approved providers. Loan is repaid through the tax system once income is above the repayment threshold.

Students enrolling in Diploma and above level VET qualifications.

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