21 July 2013

How to fix the cap on self-education

How to fix the cap on self-education

The Government’s $2000 cap on self-education is yet another example of a poorly thought out policy that only marginally increases revenue with little regard to fairness or implications. Wane Swan’s announcement justified the cap would not harm most Australians as the average claim was only $905, and this reform would stamp out rort claims for “first class airfares, five star accommodation and expensive courses.” He is right. It will probably stamp out all education beyond worker’s first degree since education has never been more expensive, thanks to Government policies both state and federal, Liberal and Labor.

Worse, the Australian Taxation Office has confirmed that even if the employer pays, they will incur FBT on education and Professional Development over $2000 under the “not-otherwise-deductible” rule. Professionals should expect a significant drop PD in after 1 July 2014.

There is little hope of change. During an election year the opposition would have prominently promised to repeal the cap if they had any intention to do so. So far the coalition has remained silent.

Professional associations such as the Australian Medical Association, CPA Australia, the Institute of Chartered Accountants Australia and others are worried. Universities realise the cap effectively increases the true economic price of their professional master programs by roughly 40%. Many professionals need to attend ongoing PD just to maintain registration. Naturally, there are many interests that wish to completely scrap the cap.

There are better ways to curtail rorts, reduce complexity, improve fairness and economic efficiency.

The core problem is the mismatch between physical capital and human capital. Currently if a tradesman spends $50,000 on a van he would not be able to deduct the cost, but would be able to claim the depreciation over 8 years. Conversely, a university student who spends $50,000 on his undergraduate degree will receive no tax benefit unless they were already working in their field. Unfortunately, you need a degree just to get into your field. Almost no one can claim their undergraduate education as the cost is “incurred too soon”.

Judges have consistently reasoned that the purchase of an enduring productive thing is a capital asset, but an investment in skill is something that is “used up” immediately and thus should be expensed. This ignores the fact that a tertiary education is a productive human asset that lasts the length of a professional career.

In fact we have already addressed this income/capital mismatch elsewhere. Both loan establishment costs and business-related capital expenditure (commonly known as ‘black hole’ expenses) are specific deductions allowed over 5 years. Depreciation splits the cash flow from expense, spreading expense out over the useful life of the asset. If we can arbitrarily depreciate these intangible capital expenses, then why not allow depreciation on education?

I propose that we allow deductions for depreciation on all Australian nationally recognised tertiary tuition over 10 years. Workers would still need to show a necessary and sufficient connection between their current employment and their study – just as they do now for PD. To give students the incentives to complete their studies, deprecation claims would only be allowed from the day of graduation. All other immediate deductions for self-education would be restricted or disallowed.

This reform is designed to help lift long term labour productivity. All businesses are a combination of labour and capital. Currently the owners of costly but productive human capital are subsidising the owners of physical capital which is abundant, diversified and underutilised. This proposal seeks to equalise the tax treatment of human capital with physical capital.

This is a better way to crackdown on junkets by simply focusing on recognised education by quality providers. The compliance burden could be reduced as the ATO could automatically provide a depreciation schedule as part of tax payer’s annual HECS statement. Other providers could print a claims schedule as an attachment to their academic transcript.

This preference to recognise business expenses and penalise productive individuals is a recurring theme in our taxation system. The taxation bias contributes to an Australian economic environment that is heavy with physical assets, such as of mining and property, and leaves the nation with a dearth of technology and research industries. Not all forms of investment receive a ‘fair go’ under our current tax system.

If our leaders truly want a smarter Australia, we will need a smarter tax system.

-Phillip out