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Tax-deductible Childcare: What Women Want Makes Economic Sense

September 27, 2011

​​Working parents can claim a tax deduction for motor vehicles, mobile phones, even iPads – but it's childcare that is often the single biggest and most directly related cost to earning income and currently claiming it as a tax deduction is disallowed. There is a growing band of women and men who believe this is not only unfair, but it's an impediment to women's participation in the workforce, particularly when it comes to advancing women into leadership roles and at board level.

To illustrate the point, when Michelle Guthrie, chair of aid agency Plan International Hong Kong, and a former chief executive of the STAR media and entertainment company in Asia, addressed the Advance Women's Leadership Summit held at the Sydney Opera House earlier this year, she talked about the problems she faced returning to Australia for an 18-month period. Guthrie said she had been forced to stop working because childcare arrangements were so difficult and so prohibitively expensive, eating up more than 50% of her after-tax salary. Expatriate women working in senior roles abroad simply did not have the same problems finding and funding childcare as those faced by Australian women executives, claimed Guthrie who is now the director of strategic business development for Google, based in Singapore.

Women's presence in the workforce has been growing over the last 30 years, according to Australian Bureau of Statistics, reaching 59.3% of the workforce in 2009. One of the most profound changes within this trend is the increase in the proportion of married women with dependent children in the workplace, which increased from 41% in 1978 to 63% in 2009.

Despite this, women are poorly represented at the top of the business ladder, making up only 11% of the top 200 board appointments. In the World Economic Forum's Global Gender Gap Report of 2010, which charts women's economic participation in the workforce, Australia ranks 24th, behind countries such as Mozambique and Lesotho. In stark contrast, Australia is in pole position for having a highly educated female population.

As Helen Conway, director of Australia's Equal Opportunity for Women in the Workplace Agency (EOWA), comments: "It seems very odd to me that we spend all this money educating women and then we don't utilise it and we also have skills shortages in certain occupations."

The issue of tax deductibility goes to the heart of Australians' social attitudes to parenting, and investing in childcare should be seen as value added to the economy, according to Rosamund Christie, who runs the Australian Graduate School of Management (AGSM) Women in Leadership program. "When are we going to change our attitude to the absolute and natural right for people to have children without being penalised for it?" she asks. Christie says tax-deductibility of childcare ought to be a right "because our economy depends on a fully functioning workforce and – however it gets that – it should be supported."

Economic Consequences

​Existing childcare benefits were cut in August by up to A$679 per child and frozen for three years after minority party the Greens backed the federal government's long-thwarted attempts to lower the cap and save A$81 million. But even before the non-means tested childcare rebate was reduced from A$8179 per child per year to A$7500, the benefit meant it often made little financial sense for working women, even those in high-earning income brackets, to return to work after having children, according to Carol Schwartz, Stockland Group director and founding chair of the Women's Leadership Institute Australia. She says the country's economy is suffering as a result.

"We don't have the same number of women as we do men contributing to the economy, so we're losing out on GDP. We're missing out on potential higher shareholder returns and returns on equity in our organisations, if you believe what the McKinsey and Goldman Sachs reports are all saying."

According to a 2009 Goldman Sachs report, Australia's Hidden Resource: The Economic Case for Increasing Female Participation, it would make huge economic sense for Australia to narrow the gap between male and female employment rates, particularly in leadership roles. The current gender bias means that women are not being employed in roles where they can be most productive. With more women running the show, the level of economic activity in Australia could be boosted by 20%, suggests the report.

"The problem is there are some non-believers out there but generally people think that women should be given equal opportunities," says Helen Conway at EOWA. "There's a lot of talk going on but not much action. Businesses recognise the need to attract women into the workforce emotionally, but they haven't internalised that it's good for their business."

What has been good for business is the introduction of the childcare rebate by the federal government in 2006. The rebate has been credited with increasing the number of working women from 4.57 million to 5.19 million.

There are two childcare subsidies available, explains Helen Hodgson, a senior lecturer in Business Law and Taxation at the Australian School of Business. "One is the childcare benefit. That is means tested and depends on how many children you have and how many hours they are in care. There are many other factors that go into assessing it; the means test is incredibly complicated and there are calls for it to be simplified." On top of that is the childcare rebate, mentioned earlier, which pays 50% of childcare costs (after deducting any childcare benefit that is received), and is now capped at A$7500 per child.

"A family with two, full-time earners probably won't get too much childcare benefit and most women who are working more than two or three days a week will be relying on the childcare rebate," says Hodgson.

Opposing Means Testing

​Recently, the government has been talking about making the rebate means-tested as well, and applying a A$150,000 to A$200,000 household income cap. It's a proposal that has brought a swift response from unions and employers. Australian Chamber of Commerce and Industry chief Peter Anderson said that if a means test had the effect of reducing the participation of women in the workforce, then it would be opposed.

Whatever happens to the rebate, come January 2012, it will have to stretch a bit further as childcare costs are also set to rise. Community-based childcare centres across Australia are likely to cost up to A$10 a day more per child. This follows federal government requirements for higher qualified staff to work in childcare centres, along with improved staff-to-child ratios. Some centres have already raised their fees in anticipation of the hike. But these increases are much less than those forecast by private sector centres, which are projected to rise by up to A$33 a day.

Hodgson says the impact of the cost increases in childcare is that women will be out of pocket by at least 50% of the increased amount because they only get reimbursed for, at most, half of the cost if they remain under the A$7500 cap. "So if you're paying an extra A$20 a week in childcare, then that's [at least] an extra A$500 a year – it's not insignificant," she notes.

Research highlighted by the Productivity Commission in July 2011 shows that a 1% increase in early childhood education and care fees leads to a 0.3% reduction in the employment rate of mothers with young children and a 0.7% decline in hours worked. Unless the government is prepared to increase taxpayer subsidies for childcare, the commission warned, these changes could reduce women's participation and contradict Prime Minister Julia Gillard's agenda of encouraging more people into the workforce.

Jennifer Dalitz has no doubt that this is already happening and will only get worse. An AGSM alumnus, she is founder of Sphinxx, a social enterprise working to achieve gender balance in leadership. Earlier this year, Dalitz launched a grassroots campaign Make Care Fair to raise awareness with policymakers on the need for childcare tax reforms.

Dalitz points to one survey conducted by the Childcare Alliance Australia in 2010, in which 51% of respondents claimed if the costs of childcare increased any further they would seriously consider one parent stopping work to care for the children at home. In another, the annual careforkids.com survey of mothers, nearly a quarter said that the expense of childcare meant working at the moment was not financially viable, but they stayed in their jobs because they wanted independence and career progression. For those women who left the workforce because of the cost of care, there was a compound negative effect, with 52% of unemployed carers feeling that their skills were declining and 49% losing confidence in their ability to return to work.

The rigidity of the current framework – with long day care centres as the vehicle and means-tested/capped rebates for the support – are inadequate for those in leadership positions who have to work longer and less predictable hours than this model allows. The model also does not fit shiftworkers, such as nurses.

"Ask any senior professional how they manage work and family and they always have a common denominator: in-home care. They'll also tell you that this represents the single biggest cost relative to their income," says Dalitz. While some employers have gone down the route of employer-sponsored childcare, Dalitz says it's not what most women want. "They want choice when it comes to the care of their children, and most want in-home care. But it costs in the vicinity of A$80,000 to get a quality professional carer to work in-home, so not everyone can afford it, especially if you're still in the leadership pipeline. Most women with young children can't earn assessable income without incurring childcare costs, so why shouldn't this be an allowable deduction against their taxable income?" asks Dalitz.

Evaluating Fairness

​Policymakers argue that the current rebate structure is more beneficial than deductibility for lower income earners, and that as deductibility will only benefit high-income earners, it's unfair. "For most women who fall into the 30% to 40% tax rate, 50% rebate is actually more than they would get as a tax deduction," Hodgson points out. "So unless you're running up against those caps of A$7500 per child, you would still be out of pocket by more if it was a tax deduction."

But Dalitz believes that parents should be able to choose which system to adopt and that costs vary depending on where you live – something the present tax system does not take into account. "In Sydney if you're paying A$120 a day for childcare for one child, your rebate caps out after 25 weeks [a cost of $15,000 qualifying for $7500 rebate] – and after that you're paying full tote odds. But if you live in Adelaide or a regional area where you can find a vacancy it might cost only A$60 a day for the local day care centre, so the rebate covers 50 per cent of the full year's costs. How is this fair?"

However, as the government's mychild.gov.au website shows, even in Adelaide it can be challenging to come by a centre with fees of less than the magic figure of A$60 a day – the maximum amount required for parents hoping to receive their full 50% rebate under the current cap in a centre that is open 50 weeks of the year. Fees would more typically be about A$70 a day.

Judith MacCormick, a post-doctoral research fellow at the Australian School of Business, believes that the structure of the way we work is outdated and this is at the root of the problem concerning childcare costs and access. "We are working from a 150-year-old model that was suited to the industrial era and that's also very hierarchical. With mobile technology, we can distribute information quickly and make decisions quickly and that makes it more possible for women to participate." But remote working is still only a pipe dream for most women who are forced to interrupt their careers, return to work part-time or give up work altogether. And, even if women can work remotely, they would still need alternative care for young children much of the time as many home workers report that while telecommuting might make coping with kids' sick days easier, and reduce the amount of travel tired working parents need to do, it is simply not possible to provide adequate care for young children while also performing work duties. 

MacCormick believes the debate over childcare needs to move away from gender to flexibility and to include men. "Men want more involvement in child rearing but they are equally concerned about the impact on their careers and income," she says. EOWA's Conway agrees: "Equality of opportunity, earnings, career progression, tax breaks – these aren't women's issues, they are family issues."
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