It helps when daddy's a tax lawyer

There's this nice feel good story on the front page of the Australian today.  It  reports about a young lass who managed to take on the evil tax man and win at the high court.  She is now able to claim deductions for all of her study because the social security payment she received was linked to her going to school. 


This is sounds like a good outcome for students, but is inequitable as it does not apply across all students. We actually need to allow ALL students (including our internationals) to capitalise and then "depreciate" their education over their working lives - I proposed a 5 year write off period.


Basically you need to show that there is a "nexus" or a sufficient connection between money in and money out.  So if you need to spend money to make money, you get the deduction for the money out.  This means that since our friendly young student teacher was getting Youth Allowance (a means tested Australian Government social security payment to students who are citizens), she HAD to go to school to get it, and therefore HAD to buy book, bus tickets etc...  This is 

you need to show that there is a "nexus" or a sufficient connection between money in and money out.

This is where the law falls down.  I am 100% behind the High Court's decision, but I fear that it's a correct legal outcome but not the equitable outcome.  The student that does not receive youth allowance gets nothing.  Likewise the international student (who makes up our second biggest export) gets not a damn thing.  How is this fair? Actually, I believe that this ruling means that she should have been able to claim her HECS (tuition) fees also.  


Something has to change  
That something is likely to be the parliament.  For sure The Australian Government will use their legislative right just to cover over the hole in the same way they did in the La Rosa case.  [ for the legal nerds, that would be FC of T v LA ROSA 2003 ATC 4510]  La Rosa was a drug dealer who, like Al Capone was done by the tax office. (I realize it was the IRS rather than the ATO, but let's move on).  The Commissioner of Taxation La Rosa alleged that La Rosa had not filed a tax return or reported his income from his business operations -  you know the sort of business where you push drugs.  But La Rosa claimed he was robbed of all of his profits and therefore claimed a deduction for the theft.  


Of course, the government wasn't about to give the bad guys a head start in tax, so the wrote  s26-54 ITAA97 to prevent and deduction or CGT cost base to the extent that they relate to illegal activities.  So all of the income is assessable, but none of the expenses would be allowed as deductions.  Harsh, but kind of fair.  


The point is that the Gillard government would be quick to cover up this new "loophole" and just write a specific denial for ALL education expenses at universities.  Problem is, that we should be creating tax incentives to go to school. 


Make it fair and give it to everyone
Supposed I am a tradesmen and I sink $50'000 into a van for my business, I get a a deduction on the van by way of depreciation.  But if I drop the same $50'000 and 3 years of my life into an accounting degree (and work crappy hospitality jobs to pay the way) then I get not a damn thing because there is no current nexus between my crappy hospitality income and the accounting degree.  So the tradesmen has a direct incentive to invest in physical capital, but human capital 


Now I teach accounting at the university level, and I dare anyone to study accounting for "private use, enjoyment and fun".  The ONLY reason you study accounting is to get a job and make money.  There should be no difference between a dollar invested in tangible capital, and a dollar spent on human capital.  Why do we slog the workers so hare and give business (the owners of capital) all the tax breaks?  Indeed there is a wealth of research to suggest that investment in education yields some of the highest returns.  


Rather then focusing on the raw surpluses as the only measure of the government's economic success, Shouldn't we attempt to make the tax system fairer and increase it's efficiency?  BP recently turned around a profit (as it sold off assets to pay out pending damagers) but it also trashed the gulf of Mexico.  If we just look at this quarter's "bottom line" we could deem BP's oil spill a great success as we realized profits. But that's insane.  


Likewise, a system that penalizes the MOST productive workers but grants businesses deductions is also insane.  


So how about I claim some depreciation on HECS bill Ms Gillard? 


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