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.

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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

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    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.

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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.

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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.