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,
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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.
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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
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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.