KEY POINTS:
As the summer holidays drift to an end, many working parents are again facing the problem of prohibitively expensive, possibly unaffordable, childcare.
In July 2007, the Government introduced up to 20 hours of subsidised childcare for 3- and 4-years-olds but this goes only part of the way to cover the cost. In particular, it fails to address the tax treatment of childcare expenses.
Under current tax law, parents cannot deduct the cost of daycare incurred while they are elsewhere earning income. The Income Tax Act and case law stipulate that such expenses are personal and therefore cannot be deducted for tax purposes. So parents must work to derive income upon which they pay tax - and then must pay for the childcare that enables them to work out of their post-tax income.
By way of example, the University of Auckland creche charges an annual fee of approximately $12,000 for fulltime childcare. This means a university employee with a child in care must earn up to $17,300 (and pay tax of almost $6000) in order to cover the cost.
Furthermore, in New Zealand (unlike most countries), employer sponsored childcare normally incurs Fringe Benefit Tax (FBT), thereby creating a disincentive for employers to subsidise childcare. Only where the creche is provided entirely on the employer's premises will the FBT not apply.
In addition to this unfavourable treatment, the Income Tax Act allows parents a maximum childcare rebate of $310 per year. This very low sum means that, whatever the actual amount paid for childcare during the year or how many children they have in a creche, parents can claim a total of only $310.
This paltry figure has not been increased since the 1980s. While it may then have been a reasonable sum, it is now unrealistic.
A similarly low rebate limit of $630 used to apply for charitable donations (increased from $500 in 2003). That limit was removed this year. Yet strangely no steps were taken to increase the $310 limit applying to childcare.
This unfavourable New Zealand position may be contrasted with Australia, where the affordability of childcare was a major election issue. Currently in Australia, the Government pays subsidies to childcare facilities (similar to the system introduced here in July 2007). In addition, working parents may claim what is called the Child Care Tax Rebate of 30 per cent of their actual childcare expenses, up to a total of $14,000.
This means Australian parents can claim an annual tax rebate of up to $4200. Furthermore, unlike New Zealand, this rebate is calculated per child, which means that amount is available for each child in care. Finally, even if only one parent pays for childcare, the rebate/s may be shared between both parents.
This regime makes the New Zealand rebate of $310 seem derisory by comparison.
In the competition for skilled workers it is therefore not merely the different rates of tax and income that make Australia more attractive, particularly to working parents.
In the past 10 years, New Zealand has had two consecutive female Prime Ministers and a female Governor-General. It is surprising that we continue with such a parsimonious tax regime for childcare. In an election year, surely this issue is overdue for reform, if only to attract the votes of working women.
* Mark Keating is a senior lecturer in tax law at the University of Auckland Business School.
