Dale Boccabella

As currently couched, the self-education deduction capping measure is not targeted at the claimed mischief and it therefore overwhelmingly looks like a revenue raising measure. To dispel this, the government needs to target the measure.

As part of the government’s National Plan for School Improvement (NPSI), a $2,000 per year cap will be placed on deductions for self-education expenditure related to production of a taxpayer’s income. It is planned to start in 2014-15 and is expected to save the government around $520 million over the forward estimates (3-4 years).

Two justifications were given. First, this measure will generate savings towards the cost of the NPSI. Secondly, some taxpayers are spending too much on their self-education and/or their expenses involve “luxury” self-education. The Treasurer suggested that without a cap, some taxpayers are able to enjoy a significant “private benefit” at the expense of taxpayers.

Denying these deductions to raise revenues for an expenditure program is using the tax system for a “foreign purpose”. And, this point holds even if the topic of tax deductions bears some relationship with the expenditure program. In this case, this is debatable.

The Treasurer has some basis for arguing that the capping can be justified by the “private benefit” aspect. There are many tax cases involving claims for overseas and interstate travel where the taxpayer attaches leisure to attendance at a relevant conference. The tax tribunals have been rather generous when it comes to apportioning expenditure on air travel between the deductible conference attendance and the non-deductible leisure pursuit. This capping measure may put a ceiling on “suspect claims” but it will not address the private element of expenditure where it is below the $2,000 cap because it is not targeted at “private items” of self-education expenditure.

The cap more broadly can be seen as an equity measure as it puts a ceiling on a category of otherwise deductible expenses and therefore can reduce the detrimental “upside down” effect (i.e. taxpayers on higher tax rates get bigger tax break from a given deduction amount) that comes with all deductions. But, many people incurring non-private benefit and expensive self-education are in the earlier stages of their careers and are on lower tax rates. For them, the capping appears inequitable.

Although bluntly targeted, this measure will in part deny deductions for taxpayers with high “luxury” income-related expenditure. The short and legitimate question is, why is the capping only relevant to self-education expenses? Why isn’t it considered where other “luxury” deductible spending occurs? After all, isn’t there a large private benefit to a taxpayer undertaking business or first class air travel or five star accommodation for their work, outside the self-education context?

The extra problem is that the measure also operates to deny deductions for taxpayers with high “non-luxury” income related expenditures of self-education; again, the targeting of the private benefit appears to be missing. This tends to undermine the denial of the private benefit rationale and brings the government admitted revenue-raising rationale to the fore.

The deductibility of self-education expenses is one of the most troublesome areas under the general deduction provision and an area where the error rate is very high amongst taxpayers and their advisers. At times, this uncertainty encourages unscrupulous taxpayers and tax agents to make iffy claims knowing full well they may not be called to account. This announcement doesn’t address complexity because the focus is on capping. However, the government could use the opportunity to set out some bright lines on the circumstances where self-education is deductible. After all, it will have to do this to identify expenditure subject to the cap.

Perversely, the introduction of the cap may actually convince some taxpayers to claim an amount of self-education deductions just under the cap as deduction caps can send the “wrong message” (i.e. it is viewed as giving a deduction). Such practices need robust compliance follow up from the ATO.

Finally, many will argue that denying/capping deductions for income related self-education expenses is sending the wrong message and that some may be discouraged from engaging in education. Time will tell, but the argument puts considerable faith in the power of a tax deduction.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.