― 163 ―

12. Chapter 12 Personal Income Tax: Dependant Allowances and Other Concessional Deductions

12.1 Fairness between persons who differ from one another in the level of their income involves questions of rate structure to be examined in Chapter 14. Fairness between persons who differ from one another in other relevant respects has to be achieved by alternative means, the chief of which might be concessional deductions as is the case today. Statistical information about the size and composition of these concessional deductions, for the income year 1971–72, is summarised in Table 12.A.


Average deduction claimed for  
Income range   Proportion of taxpayers   Average net income   Dependants   Medical and hospital benefits fund payments   Net medical (a)   Rates and land taxes (b)   Life insurance and superannuation payments   Education (b)   Other (c)   Total (d)  
Per cent 
417–1,999  21.9  1,255  23  15  28  22  26  127 
2,000–2,999  18.0  2,506  77  30  54  20  57  20  42  300 
3,000–3,999  18.6  3,493  174  47  76  41  102  40  60  540 
4,000–5,999  25.9  4,858  302  69  105  74  190  78  106  924 
6,000–9,999  12.6  7,338  384  81  135  107  435  135  218  1,495 
10,000–19,999  2.7  12,797  365  86  183  168  790  243  440  2,275 
20,000+  0.4  29,379  290  88  289  302  916  360  923  3,168 
note note note note note  

12.2. It is convenient to discuss first the concessions of most universal significance, those for dependants, before turning in Section II to some of the basic issues raised by the whole system of deductions. In Section III attention is focused on deductions for education and medical expenses, and in Section IV on zone allowances.

I. Concessional Deductions: Dependants

12.3. At present, under section 82B of the Income Tax Assessment Act there is a deduction of $364 for a dependent spouse, which is rapidly reduced when the spouse has income of her (or his) own. There are two criticisms of the concession: the first that a poor man's wife is worth less than a rich man's, the second that the concession is in any case too modest.

12.4. One view of the spouse deduction would be that at least a basic minimum which one spouse might be expected to spend on the other who is dependent on him should not be taxed. This points to a deduction approach to the concession. However,

  ― 164 ―
in lower income ranges, where the marginal rate of tax is less, the tax saving from a deduction is correspondingly smaller. It is questionable whether the effective assistance should be so unequally distributed, and should be least where it will be of most, if never great, real assistance. The Committee suggests that consideration be given to converting the present deduction to a tax rebate diminishing in relation to the income of the spouse. (By rebate in this context is meant an amount subtracted from tax otherwise payable.) The 1974–75 Budget has taken a step in this direction. As explained in paragraph 6.57, the deduction has, in effect, been converted to a rebate for taxpayers with marginal rates below 40 per cent.

12.5. The second criticism, that the concession is too modest, is sometimes expressed by saying that the reduction in tax liability to which it gives rise is far below the total ‘cost’ of the dependent spouse to the income earner. However, such cost considerations do not appear to lie behind the concession, which has never amounted to much more than a token recognition that husbands have a moral and legal duty to support their wives, when dependent, and wives a similar duty when husbands have no income.

12.6. Nonetheless, even as a token recognition the real value of the concession has declined significantly in recent years in the face of rapid inflation, a situation to which attention was drawn in Chapter 6. And while the measures taken in the 1974–75 Budget have gone some way towards restoring the value of the concession for low-income earners, a strong case can undoubtedly be made for increasing the value of the concession more generally. In the Committee's view, a tax rebate of, say, $300 may not be inappropriate: this compares with a tax saving, under the present concession, ranging from $146 for a person paying marginal rates of 40 per cent or less to $244 for somebody in the top tax bracket. The rebate could be phased out by one dollar for every three dollars of income of the spouse over $130. It would thus disappear at $1,030, just below the present minimum taxable income.

12.7. Under the administration of the existing law, a husband whose wife works and earns income, of whatever amount, during part of a year may still claim a pro rata deduction on the basis that his wife was a dependant without income for the remainder of the year. This produces anomalies where the wife works, perhaps only part time, over the whole year, and also where the wife derives property income (which is treated as being referable to the whole year). In these instances there is unlikely to be any allowance of a deduction even though the income of the wife for the year is less than the income of the wife who works for only part of the year.

12.8. Such anomalies will be largely overcome, in the Committee's view, if contribution to the maintenance of the spouse at any time during the year is treated as sufficient to justify a concession, and it is provided that the income of the spouse which may go to diminish the concession is any income derived during the year. Where the marriage subsists for only part of the year there should be a proportionate concession allowable, diminished by reference to income derived during the period of marriage. The income affecting the concession in this case would be the excess over the appropriate fraction of $130.

12.9. Were the option of family unit taxation available, there would not be any need for a tax rebate for a dependent spouse. The rebate would in effect be absorbed in the fixing of the rate scale.

  ― 165 ―

12.10. It is also to be noted that if and when income tax were reduced or even eliminated for low incomes, a tax rebate would cease to be of help. It would then be necessary to consider whether the rebate ought to be converted into a taxable grant.

12.11. The Act provides, in section 82B, for a group of concessional deductions that would appear to express the same policy as the concessional deduction for a dependent spouse: they are a recognition of what is at least a moral duty to give support to another adult. A concessional deduction is available when the taxpayer contributes to the maintenance of:

  • (a) a daughter-housekeeper, wholly engaged in keeping house for a taxpayer who is a widower or widow;
  • (b) a parent of the taxpayer or of his spouse;
  • (c) an invalid child, brother or sister of the taxpayer, who is over 16 years of age and in receipt of an invalid pension or certified to be permanently incapacitated for work.

The amount of the deduction in all cases diminishes where the dependant has income. The maximum deduction is $364 except in case (c) when, curiously, it is only $260. In the Committee's view these concessions should be retained; but in line with its recommendations in regard to the dependent spouse deduction, they should be converted to tax rebates.

12.12. Another concessional deduction is allowed, under section 82D, where a housekeeper is wholly engaged in keeping house for the taxpayer and in caring for his child, invalid wife or other invalid relative (see paragraph 7.67). The availability of the deduction does not depend on contribution to the maintenance of the housekeeper and is not diminished by reference to the income of the housekeeper. The amount of the deduction is $364. Normally, the housekeeper deduction is not available where the taxpayer is married, except where the spouse is an invalid and the housekeeper cares for her. The correlation of this deduction with the concession in respect of child-minding expenses proposed by the Committee was considered in paragraphs 7.66–7.75. While the dependant deduction for spouse recognises the obligation to support a spouse and the dependant deductions referred to in paragraph 12.11 recognise the obligation to support other adult persons, section 82D's policy is more difficult to express. It would seem to recognise that the taxpayer has been put to special expense because he does not have the services of a wife to assist him in meeting his legal or moral obligations to support others or because he has been put to special expense in meeting his legal or moral obligations to his invalid wife. In either case, however, the support necessary is something more than financial. In the Committee's view the concession should be retained but be converted into a tax rebate. There should also be some modification of the requirement that the housekeeper be ‘wholly’ engaged in keeping house to make the requirement less rigid. The Committee understands that the practice of the Commissioner is to allow the concession in circumstances that may not strictly satisfy the test.

12.13. Section 82B allows deductions for dependent children under 16 years of age. The deduction is $260 for the first such child and $208 for others. The deduction is diminished dollar for dollar by the child's income over $130. The solution of the equity problem created by the existence of dependent children is complicated, as it is for all the other needs now partially met by tax deductions, by the presence of non-tax devices serving similar ends. In this case there is only one other general aid—child endowment payments through the social service system. One curious difference is

  ― 166 ―
noteworthy: while the $260 tax deduction for the first child is larger than that for later children, child endowment rises after the first child. In total value the two kinds of help must normally be well below the total cost of supporting children. Since they can scarcely be put forward as subsidies deliberately designed to increase population, they are presumably intended primarily to enable parents to meet minimum levels of expenditure upon their children's needs without too great a sacrifice to their own.

12.14. It is untidy to have two instruments of policy for the same purpose. The Committee sees advantages in the suggestion made in the Interim Report of the Commission of Inquiry into Poverty (1974) that the dependent child allowance be abolished and child endowment correspondingly increased.

12.15. At the same time the Committee regards the tax-exempt status of child endowment as anomalous and likely to become more so if social policy towards poverty dictates its increase. There is therefore a good case for making it taxable in the hands of parents. With taxation on the individual unit basis, a teasing problem must be solved: that of choosing which parental income the payments should be added to for tax purposes. There are arguments pointing both ways: some for adding them to the income of the parent in daily charge of the child (to whom the endowment is now paid—usually of course the mother); others for adding them to the larger income. In the Committee's view the former is appropriate where only one parent has the care of the child. Where the child lives with both parents, child endowment should be added to the larger income. Were the family unit option available, this problem would largely disappear.

12.16. The discussion of the dependent child concession has so far been concerned with the concession given under section 82B in respect of a child under 16 years of age. Where the taxpayer contributes to the maintenance of a student not less than 16 years of age but less than 25, a concessional deduction is available under section 82B phased out by reference to the child's income. (‘Student’ is defined to mean a person receiving full-time education at a school, college or university.) The concession, modified in one respect, should be retained but converted to a tax rebate. The modification would make the commencing age 18 instead of 16. In Chapter 11 the Committee has proposed that the unearned income of a minor (a person under 18) be taxed at rates determined by the amount of that income and the income of his parents. It would be convenient if child endowment were made to replace the dependant deduction of any minor child. Thereafter the student child concession would apply. The income of the student child, which would be taxed without reference to his parents’ income, would of course dictate the phasing out of the concession.

II Other Concessional Deductions: Issues of Principle

12.17 Besides the deductions for dependants, existing legislation contains no fewer than twenty-three other deductions from net income. A list will be a reminder of additional complexity they introduce into a tax that must inevitably be complex even without them: net medical (including chemists’) expenses, dental expenses, optical expenses, therapeutic treatment expenses, expenses for artifical limbs and eyes, expenses for hearing aids, expenses for medical and surgical appliances, attendant's remuneration paid on account of blindness or permanent confinement to a bed or invalid chair, maintenance expenses of a guide dog for a blind person, payments to a medical or hospital benefits fund, funeral or burial or cremation expenses, subscriptions to professional associations or unions, payments of insurance premiums, payments to a superannuation or similar fund, rates and land taxes paid on principal

  ― 167 ―
residence, mortgage interest on home purchases, gifts to approved institutions, zone allowances, overseas service allowance, living-away-from-home allowance, education expenses for dependants, self-education expenses, legal and other expenses incurred in the adoption of children. Most of these deductions apply to expenditure made by the taxpayer on behalf of dependants as well as on the taxpayer's own behalf; in some cases, the amount of the deduction is limited.

12.18. Collectively, the deductions for dependants and these deductions are of very great quantitative significance. They reduce the tax base by almost 20 per cent, involving a loss of revenue under the current progressive rate structure equivalent to more than one-third of the sums actually raised. In other words, removal of all concessional deductions would permit a reduction in tax rates over all income levels by a proportion, on average, of more than 25 per cent of the rate currently applying. Figures for the most significant of the concessions available are set out in Table 12.A. for the year 1971–72. As indicated in the footnote to that table, 28 per cent of total deductions claimed in that year was for dependants; a further 24 per cent for life insurance and superannuation payments; 19 per cent for medical expenditure, broadly defined, and medical insurance; 8 per cent for education expenses; and 7 per cent for rates and land taxes. Some general discussion of the issues of principle to which they give rise is essential.

12.19. There are two main reasons in principle why in one form or another such concessions may be considered necessary. As already mentioned, some are introduced for purposes of equity. But they can also be given for efficiency reasons: to encourage individuals to adjust their expenditure in various ways, because increases in expenditure on particular items are held to be socially or economically desirable. Gifts to charity and contributions to superannuation funds and life insurance policies probably come under this head, and so perhaps do the deductions for education and zone allowances, in so far as these are specifically designed to increase sums spent on education or to attract population to remote areas.

12.20. Concessions granted for any one purpose will generally have consequences for others, whether this is desired or not. A deduction of medical, dental and chemists’ expenses designed to achieve horizontal equity will also serve to raise taxpayers’ expenditure in this area. Allowing mortgage interest as a deduction from assessable income, so as to encourage home-ownership among lower income groups, will incidentally influence the progressivity of the income tax structure; it will also have equity repercussions between home-buyers and others, and between different home-buyers according to the proportion of income spent on housing.

12.21. It cannot be presumed that the benefits of any concession will fully accrue to the taxpayer. When the supply of the commodity or service to which it is directed is unresponsive to price changes, the higher demand stemming from the concession will cause a noticeable rise in price, to the ultimate benefit of suppliers rather than consumers. For example, the aids to home-ownership may evaporate in capital gains to landowners and home-owners, and may reduce the supply and raise the cost of rented accommodation.

12.22. It is important to bear in mind that the particular objectives served by concessional deductions are also served by other kinds of government activity. The dual assistance given on account of children has already been noted. In other cases the range of instruments employed is as great or greater. Provision is made for old age by age pensions, subsidised medical and transport services, and by the tax assistance given to saving through superannuation and life assurance policies; for unemployment not

  ― 168 ―
only by social service benefits but also by their exemption from tax; for sickness by tax deductions for medical, dental and pharmaceutical expenses, by the exemption of medical supplies from sales tax, by the provision of public hospitals, by the subsidisation of medical insurance funds, and by sickness benefits and their exemption from income tax. The ends of education are served by various income tax deductions, by the exemption of educational supplies from sales tax, by the public provision of much education at all levels, by the partial subsidisation of private educational institutions, by scholarships and student living allowances and their exemption from income tax. Home-ownership is encouraged by the income tax deduction for local rates and land taxes, and by a new scheme, devised on a family basis, for the deductibility of mortgage interest, as well as by the subsidisation of housing loans, and by home savings grants. Furthermore, the exclusion of imputed rents from the income tax base may not improperly be regarded as an income tax deduction. Doubtless this summary list could be extended.

12.23. It is plain enough that this welter of simultaneously operating aids to areas of need that are partly met through income tax deductions has grown up over the years in a piecemeal way. Some of their cumulative consequences, could they be estimated, might be found to be very far from what was intended.

12.24. Rationalisation and simplification in the pattern of government intervention in these areas of expenditure are obviously called for. It is not the Committee's function to examine the expenditure side in depth; but the future of the concessional deduction system is nevertheless very much bound up with it. Two directions of change can be distinguished. One is to use the tax system in yet more complicated ways while excising some of the activities on the expenditure side. The other is to adjust the expenditure measures and gradually reduce or eliminate the corresponding tax concessions. A good case can be made for the latter course.

12.25. To take the principal areas involved, government expenditures in the fields of health and education are already substantial and may well increase. Government thereby exerts a powerful influence over the quantity of these services and the price at which they are offered to the public. Any extension of assistance given in these ways need not necessarily entail much expansion of bureaucracy: it might largely be a matter of adjusting the scales of existing subsidies and grants. When tax deductions are the technique adopted, assessors have a task that is essentially retrospective: to check claims made in the light of past expenditures by persons who may well have been uncertain whether or not deductions would be allowed. They have also to establish general rules to cover difficult matters: Is this book educational? Are wigs medically necessary? Concessional deductions are recognised by those who administer income tax as one of the more difficult, uncertain and costly parts of their task. On grounds of efficiency and simplicity alike, greater reliance on carefully administered public expenditure and less on concessional deductions might bring gains.

12.26. The equity problems raised by reform in this direction may not be so serious as at first sight appears. As the figures in Table 12.A bring out, the deductions allowed under the present system tend to favour those with higher incomes. The shift away from tax concessions towards expenditure measures may well reduce the extent to which this is so. If the attendant change in effective progressivity was felt to be undesirable, appropriate adjustments could be made to the rate scale.

12.27. Horizontal equity would not necessarily be diminished. The case on this ground for deductions essentially involves the proposition that when one of two persons with equal incomes spends more on the item in question than does the other, his

  ― 169 ―
‘true’ income is thereby reduced in relation to the other's. Most people, in the case of medicine for example, might agree with this, but putting a number on the difference in ‘true’ incomes is quite another matter. No two people are exactly alike, and we will all rank differently the expenses we consider ‘necessary’ rather than ‘enjoyable’ or ‘satisfying’. Once it is accepted that certain ‘necessary’ but not ‘satisfying’ expenses should be tax deductible, the flood-gates are open for endless pleading; and when a concession is made in one area, there are instant pleas for its extension into neighbouring areas. In the realities of political life, concessions for this are almost irresistibly followed by concessions for that, and then for the other thing. The income tax base, already hard enough to define at the net income level because of the problems of deciding what are expenses of earning income, becomes liable to continual erosion at the taxable income level; and with every erosion rates have to be increased if the revenue is to be maintained.

12.28. Further, it must be remembered that as the income tax is reduced, as it would be if the Committee's recommended strategy were accepted, concessional deductions become less and less capable of giving substantial help.

12.29. Hence on grounds of efficiency, simplicity and equity alike, the Committee considers that the long-term aim should be to replace concessional deductions, wherever possible, with assistance given in other ways to meet the principal needs the deductions now serve. It recognises, however, that at least three qualifications are necessary:

  • (a) Some concessions, of which those relating to superannuation and life insurance payments are the most conspicuous, are of a kind that have necessarily influenced the lifetime expenditure plans of many who have benefited from them. Considerable transitional problems would have to be attended to in any change in these areas.
  • (b) In other cases where political issues concerning the freedom of the individual are involved—possible examples of which are the cases of educational and medical expenses—a tax concession has the merit of leaving the citizen with a free choice and of saving the authorities some of the burden of administrative control.
  • (c) In certain cases, measures on the expenditure side may not be a wholly adequate replacement for tax concessions: there is likely, for example, whatever the form of government expenditure on medical services, to be continuing private expenditure in this area.

III. Concessional Deductions for Education and Medical Expenses

12.30. The previous section has dealt in general terms with the full range of present concessional deductions other than for dependants. The deductions in respect of rates and land taxes, interest on home loans, self-education expenses, contributions to associations, and living-away-from-home allowances have been considered in earlier chapters. Others, more especially the deductions for contributions to life insurance and superannuation and for gifts to charities, will be considered later in this report. It is intended to deal in this section with the deductions for education and medical expenses.

  ― 170 ―

Education Expenses

12.31. The present law allows a deduction, first introduced in 1972, for education expenses incurred by the taxpayer on his own behalf up to a prescribed limit (section 82JAA); and another deduction, dating from 1954, for such expenses incurred by a taxpayer in respect of his own child under 25 or of a person for whom he may claim a dependant deduction if that person is under 25 (section 82J). This latter deduction is also subject to a limit in respect of each person for whom a claim may be made. Until 1974 the limit, under both section 82JAA and section 82J, was $400; this has now been reduced to $150.

12.32. The deduction for self-education expenses was considered in paragraphs 7.97-7.100 and some observations were made about its correlation with the deduction for other education expenses. The Committee there foreshadowed its recommendation that the deduction for the education expenses of a child or other dependant should be retained and converted into a tax rebate. The amount of the rebate in this case would depend on applying some given percentage to the amount of actual expenditure falling within the limit.

12.33. The case for retaining the concession rests on the importance of preserving freedom of choice of education options and on an argument that it serves an equity purpose. The equity argument makes the assumption that the concession is primarily utilised by parents whose children attend non-government schools and that these schools receive less subsidy per student than government schools. If a subsidy is provided for the child of one parent and a smaller subsidy for the child of another and the parent of the first is not taxed on the difference between the subsidies, there is a case for saying that the parent of the child with the lower subsidy should be given a deduction for what he himself provides in substitution for the difference between the subsidies. The Committee sees some force in this argument and would agree that it points to a deduction rather than to a rebate. However, in so far as the question is one of achieving equity within the group of taxpayers who, in meeting education expenses of their children, provide substitutes for subsidies, a rebate appears more appropriate. The assistance given in the tax system in meeting these expenses should, it is thought, be uniform whatever be the income level of the taxpayers. The Committee therefore recommends that a rebate apply, at a rate of, say, 40 per cent. It also recommends that the limit on the amount of education expenses qualifying for rebate be set at $600 in respect of each child or other dependant. A taxpayer who spends $600 or more in education expenses of his child will thus save $240 in tax.

12.34. At present the expenses qualifying for deduction are described in the widest terms. There are two reasons for preferring a more limited definition. One is that considerable administrative problems are at present involved in checking claims which may include expenses of such items as clothing and travel. The other is to make it more likely that those who benefit by the concession are the parents whose children are the less subsidised by government expenditure. The definition that the Committee favours would limit qualifying expenses to fees for tuition.

Medical Expenses

12.35. The present provisions relating to medical expenses (in a broad sense of those words) are contained in three sections of the Act:

  • (a) Section 82HA allows a deduction of amounts paid by the taxpayer in the year of income to a medical or hospital benefits fund for the personal benefit of the

      ― 171 ―
    taxpayer or his spouse or child. The fact that the spouse or child has income is irrelevant.
  • (b) Section 82F allows a deduction of an amount paid by the taxpayer as medical expenses (as defined) in respect of himself or in respect of a dependant (again as defined). The amount is net of any sum the taxpayer or any other person is entitled to be paid by a government or public authority or by a fund referred to in section 82HA or any other society, association or fund. The term ‘medical expenses’ as used in the section covers a wide range of payments:
    • to a doctor, nurse or chemist or to a hospital;
    • to a dentist or to a registered dental mechanic;
    • for therapeutic treatment by direction of a doctor;
    • in respect of an artificial limb or eye, or a hearing aid;
    • in respect of a medical or surgical appliance prescribed by a doctor;
    • for optical services and the supply of spectacles under prescription;
    • for the services of an attendant for a blind person or a person confined to a bed or an invalid chair;
    • for the maintenance of a trained guide dog for a blind person.
    • ‘Dependant’, for purposes of the section, means the spouse of the taxpayer, or his child if less than 21 years of age and a person in respect of whom he is entitled to a deduction under section 82B. The relevant provisions of the latter section are explained above in paragraphs 12.11 and 12.16.
  • (c) Section 82G allows a deduction, limited to $100, for the funeral expenses of a dependant. A dependant has the same meaning as in section 82F.

12.36. It will be noted that in all instances where the payment is in respect of a spouse or child of the taxpayer, any income of the spouse or child is irrelevant. This might be thought anomalous, having regard to the fact that a payment in respect of any other person will qualify for deduction only when that other person's income is small enough to allow the taxpayer a dependant's deduction under section 82B. On the other hand, it could be argued that the anomaly lies in the qualified nature of the deduction in respect of these other persons. Thus a dollar of income in excess of $390 derived by an invalid relative has the effect of denying the taxpayer a medical expense deduction in respect of that relative. While this may be unavoidable if the medical expense deduction is to be kept within bounds, the Committee would think that in the case of spouse and child it is more appropriate, as now, not to impose any such qualification.

12.37. In the discussion that follows, attention is initially focused on the deductions referred to under (a) in paragraph 12.35, and also under (b) except for the last two items relating to blind persons and the seriously disabled. The remaining two items under (b) are then examined, followed by a brief comment on the funeral expense deduction.

  ― 172 ―

Payments to Medical and Hospital Benefits Funds and Medical Expenses Generally

12.38. The possibility needs to be considered of restricting the concession for medical expenses to amounts in excess of a stated limit, the object being to confine the concession to exceptionally heavy expenses. There are good administrative reasons for adopting such an arrangement: the Commissioner would be relieved of a considerable burden of assessment and verification of claims for deductions. The problem is to fix an appropriate floor. One approach would be to set the limit at a figure somewhat above the average of present claims by taxpayers without dependants. These claims are shown in Table 12.A, combined however with claims by persons with dependants. A floor of perhaps $100 might be appropriate, with a somewhat higher figure under a family unit system if one were available. The approach ought to be acceptable in terms of horizontal equity: if the floor is not too far above the average expenses of taxpayers without dependants, substantial numbers of those with dependants would qualify for the concession. The approach would, however, be open to objections in terms of vertical equity, more especially because, as Table 12.A reveals, claims for medical expenses are markedly correlated with income. Another approach, following Canadian and United States precedents, would be to express the floor as a fraction— say 3 per cent—of taxable income. This might be more equitable vertically but would raise objections in terms of horizontal equity between two taxpayers on the same level of taxable income, one of whom has dependants. It might be possible, however, to lower the floor for the latter taxpayer by adjusting taxable income to allow for dependants.

12.39. The Committee does not express a view as to whether a floor should be adopted. A choice must be made between administrative convenience if there is a floor and a more precise regard for equity if there is not.

12.40. According to one view, medical expenses are non-discretionary in character and therefore should be deducted in determining income subject to tax in the way that expenses in deriving income are deducted. This view, however, pays insufficient regard to the social service character of the concession for medical expenses. The intention is, at least in part, to give assistance to persons who have to meet medical expenses, and it might be thought that assistance should be uniform—as it is when medical services are directly subsidised by government. A compromise solution would be to allow a rebate in respect of expenses qualifying for the concession at a rate of, say, 40 per cent of the amount of the expenses: the high-income taxpayer would receive somewhat less assistance than under the present deduction, the low-income taxpayer somewhat more.

12.41. The Committee does not think that any of the existing claims should be excluded from the concessional treatment, though the precise coverage of some of them calls for comment.

12.42. The item for contributions to medical and hospital benefits funds will become less prominent as a taxpayer expense under the proposed national health insurance scheme. There will, however, be contributions for cover beyond that provided by the proposed health insurance scheme, for example for a higher grade of hospital accommodation or for expenses incurred overseas. The Committee recognises the argument that some of this cover might be thought to be for expenses within the choice of the taxpayer but would not propose to deny the concession. Nor would it propose to deny the concession to the item of payment to doctors and hospitals: while this item will also become less prominent under the new health scheme, there is again a prospect of expenses beyond the cover of the scheme.

  ― 173 ―

12.43. The item of payments to chemists raises a number of problems. A taxpayer can vouch his claim only when he has kept careful records or this has been done for him by a chemist from whom he makes regular purchases. The compliance cost is thus substantial. The taxpayer may be tempted to estimate a claim, on occasions dishonestly. Another problem concerns the requirement that the purchases in question should have been made from a chemist. It is now commonplace for drugs for the treatment of illness to be available from retailers who are not chemists. A solution to these problems, which has much to commend it, is to retain the restriction that purchases must have been made from a chemist but to limit the purchases attracting the concession to those made on the prescription of a doctor. Here too the choice lies between administrative convenience and a more precise regard for equity, and the Committee does not express a view.

12.44. The limit of the item concerned with payments for medical or surgical appliances prescribed by a doctor has given rise to considerable debate. The principal issue is whether the appliance must be something specific to the taxpayer's treatment, in the sense that it is not useful for any other purpose. Thus a heart pacemaker is specific but an air-conditioner for an asthmatic is not. If it is not necessary for the appliance to be specific, the prospect is open for many ordinary household amenities— even a swimming pool—to attract the concession. The restriction of the concession to appliances that are specific is, in the Committee's view, generally appropriate. If any other appliance is to be brought within the concession, this should be done by express provision. Thus a wig prescribed by a doctor in respect of an illness might be made the subject of such a provision.

12.45. The Committee's attention has been drawn to other expenses which in their purpose have some affinity with those now under consideration. It is not certain under the present law whether contributions to dental insurance funds are deductible in the manner of contributions to medical and hospital benefits funds. Provided the recoupment from the fund is taken into account in determining the net expense attracting the concession, as it is under section 82F in the case of a recoupment from a medical or hospital fund, the Committee sees no reason why a concession should not be available for contributions to dental insurance funds. The terms of the insurance would need to be drafted so that any payment from the fund would be by way of recoupment of a medical expense as defined in the section.

12.46. Payments made to chiropodists, chiropractors, naturopaths and the like in respect of an illness do not at present attract any concession unless for therapeutic treatment by direction of a doctor. Whether payments to any of these practitioners in other circumstances should attract concessions is a matter on which the Committee is not competent to pronounce. It is clear, however, that there would need to be some test of the qualifications of the practitioner. This might best take the form of recognition of those qualifications under statutory provisions in the place where he practises.

12.47. Expenses involved in being transported in a motor vehicle in order to consult a doctor or attend a hospital fail to qualify for a concession. The Committee does not, in general, favour giving a concession, even though such expenses may be a necessary aspect of medical attention and a payment to a doctor for his expenses in travelling to attend the taxpayer clearly qualifies already. The concession could not be so wide as to cover travel where medical purpose is not the sole, even if it be the predominant, purpose: for example, a visit to a city where one purpose is to seek medical advice. Yet it would be impossible to frame an appropriate test to restrict its scope, in an administratively manageable way, when an ordinary vehicle is used. A sole-purpose test

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could not be adopted without letting in a multitude of small claims, and the existence of an emergency—another possible test—is a matter of opinion.

12.48. A different view might be taken when the travel is by ambulance. The use of such a vehicle may be thought a sufficient indication of the sole relevance of the travel to medical attention and the seriousness of the occasion; moreover, the cost involved is readily identifiable. The Committee therefore recommends that section 82F be extended to cover the cost of travel in this way. It would also favour the extension of the section to include subscriptions to ambulance insurance funds, provided the same conditions apply as previously proposed in regard to subscriptions to dental insurance funds.

Expenses of blind persons or persons confined to bed or invalid chair

12.49. Medical expenses comprising payments for the services of an attendant for a blind person or a person confined to bed or an invalid chair, and payments for the maintenance of a trained dog for a blind person, call for special attention. These expenses differ from those so far considered in being continuous expenses over the remainder of a life: the condition must be a permanent one. The notion of giving a concession only for exceptional expenses has no application.

12.50. In the Committee's view the concession should be converted to a rebate. However, the expenses are likely to be very considerable and, more especially where the person with the disability is the taxpayer claiming the concession, may be so large in relation to the income of the person making the claim that even a generous rebate of tax will not provide the order of assistance appropriate. Consideration should be given to replacing the tax rebate in due course by further direct government assistance in the form of the provision of the necessary services or by means of grants.

12.51. Blind persons and persons confined to bed or invalid chair are the most evident cases of need, but there are other cases of continuous expenses arising from serious permanent disability: for example, the person concerned may be mentally retarded or have a congenital physical disability requiring continuous care. If it were sought to extend the tax rebate concession to these other cases, there would be problems in defining the degree of disability attracting the concession and in defining the expenses by way of travel, therapy and supervision to which it would apply. In any event, the Committee does not regard a tax rebate as the most appropriate form of assistance and would propose that in these cases, too, consideration be given to providing further direct assistance.

Funeral expenses

12.52. There is currently a concession for funeral expenses of a dependant, limited to $100. Such expenses have a close affinity with the medical expenses considered in paragraphs 12.38-12.48, and the Committee proposes, subject to the continuance of a limit, that they be treated in similar fashion. The present limit of $100 is, in the Committee's view, too low. An increase in the limit, say to $400, is therefore recommended.

IV. Zone Allowance

12.53. Persons living in more remote parts of the country may qualify for a concessional deduction in the form of a zone allowance. The availability of the deduction

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depends on residence in one of the specified areas for a minimum period in the year of income.

12.54. As explained in paragraph 12.56, the justification in the Committee's view for the continuance of zone allowances is the need to ensure horizontal equity between persons living in those zones and persons living in other areas: horizontal equity, in this respect, could not be achieved by any feasible measures on the expenditure side of public finance. But this is not to say that present zone allowance arrangements are necessarily satisfactory on all counts. The manner in which the zone boundaries are drawn has attracted criticism; so too have a number of other features, including the use of a deduction rather than rebate of tax, the size of the concession, and the qualifying period of residence.

12.55. Zone boundaries. Any criticism of the existing boundaries must raise questions about the purpose of zone allowances. When the boundaries were first fixed in 1945, such factors as the high cost of living, uncongenial climatic conditions and isolation were taken into account, and these are still referred to in the Act. Two zones, Zone A and Zone B, were delineated in terms of the degree of severity of these factors, Zone A attracting the greater concession. The zones have been changed only once when, in 1956, some areas of the old Zone B were transferred to Zone A. In broad terms Zone A takes in the area above the 26th parallel (except for the central and eastern parts of Queensland) as well as places like Norfolk Island, Macquarie Island, and the Australian Antarctic Territory. Zone B covers the rest of Western Australia (apart from the south-west corner), the more remote parts of South Australia, New South Wales and Tasmania, and the central region of Queensland.

12.56. While the factors taken into account in fixing the boundaries may suggest that the primary purpose of zone allowances is horizontal equity, the allowances also serve to encourage people to move to specified areas, and this appears to have played some part in the decision to introduce the concession. At the time of introduction, in 1945, decentralisation tended to be judged in terms of ‘developing the outback’, without reference to particular areas of the outback deserving of special attention. To the extent that decentralisation remains a purpose of zone allowances, it might be argued that the boundaries should be drawn in such a way as to encourage population movement to carefully selected areas. However, decentralisation policy is not a matter on which the Committee feels able to comment. And the Committee, in any event, has expressed its view elsewhere in the report that tax incentives should not be used as a method of implementing an economic policy unless it can be established that a better method is not available. Hence, giving effect to horizontal equity must continue to be regarded as the primary purpose of zone allowances.

12.57. The Committee is not qualified to advise on how the present zone boundaries might be redrawn to achieve greater equity. A special inquiry is clearly called for.

12.58. Deduction or rebate. The amount deductible was originally set at $80 for Zone A and $40 for Zone B. The Zone A allowance was increased in 1947 to $240 and in 1956 to $360 when the Zone B allowance was raised to $60. In 1958 the Zone A allowance became $540 and the Zone B $90. At the same time an additional concession was introduced equal to a fraction (one-half in the case of Zone A and one-twelfth in the case of Zone B) of total dependant allowances claimed by the taxpayer. The basic element in the allowance has not been adjusted since 1958; however, the additional element tied to dependant allowances has increased with the liberalisation of dependant allowances. Thus the total zone allowance for a married man with two

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dependant children was $839 (Zone A) and $130 (Zone B) in 1958; it is now $956 and $159 respectively.

12.59. In line with the view expressed earlier in this chapter that the value of a concession ought not to vary with the income of the taxpayer, the Committee recommends that the zone allowance be changed from a deduction to a rebate of tax. The present provisions linking the amount of the allowance with concessional deductions for dependants will require some adaptation. There is no difficulty in those cases where the Committee proposes the conversion of the dependant concession to a rebate: here it is simply a matter of a somewhat higher rebate for the person entitled to a zone allowance. The case of minor children is more difficult because it is proposed that the concessional deduction be replaced by an increased amount of child endowment which should be subject to tax. Consistent treatment would require higher child endowment for families qualifying for zone allowances, but this would add to the difficulties of administering child endowment. A higher rebate in recognition of dependent children would be similar in its effect to giving additional child endowment, except that the rebate would not itself be subject to tax.

12.60 The amount of the concession. The amount of the concession depends on the degree of disability associated with living in a zone. The Committee is not competent to measure this disability; but it would point out that, apart from the element tied to dependant deductions, the money amount of zone allowances has not been adjusted since 1958.

12.61. Qualifying period. A zone allowance is available where a person resides in a qualifying area or spends in total more than six months of any year of income in a qualifying area. The primary purpose of the allowance is to give recognition to the disadvantages of uncongenial climate, isolation and high cost of living associated with living in the zone. For this reason, the alternative test in the definition of ‘resident’ of a zone—‘a person who has actually been in that area, whether continuously or not’ for the required period—seems inappropriate: it can apply to a transport worker who permanently resides with his family outside the zone but may in the course of his work be intermittently in the zone for periods which in total amount to the required time. It is therefore recommended that the alternative test be withdrawn.

12.62. Teachers and others, who may reside for ten months in the zone in a calendar year but only for five months in each year of income, are unable to claim the allowance. This unfairness would be lessened by giving a taxpayer the right to elect that his entitlement to a zone allowance be determined by applying the present half-year residence test, not in relation to the year of income, but in relation to a year beginning with the day he starts residing in the area. Under this elective arrangement, the zone allowance would be claimed in the year of income in which the last day of a half-year's residence falls. Thus a taxpayer who takes up residence in a zone on 8 February 1975, and continues to reside there only until 15 December 1975 would, for purposes of qualifying for zone allowance, elect to substitute the year commencing 8 February 1975 for the income year. He would thus qualify for zone allowance in the 1975–76 income year, since 8 August 1975—the end of his half-year period of residence—falls in that year. A taxpayer who so elects would be required to retain the same qualifying year until the termination of the full period of residence to which the election relates. There would need to be an overall limiting provision to preclude more than one zone allowance in an income year.