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NTAA Submission: Proposed Self-education Expenses Cap

NTAA Submission: Proposed Self-education Expenses Cap

Editor: On 13 April 2013, the then-Treasurer annouced that, from 1 July, the Government would introduce a $2,000 annual cap on work-related self-education expense deductions

This was obviously an alarming proposal that we (and many other professional bodies) were very much against.
The Government subsequently released a discussion paper on this proposal, and below are some extracts form the NTAA’s submission.
Re: Consultation regarding the Reform to deductions for education expenses
The NTAA is grateful for the opportunity to comment on the proposed reform to claiming deductions for education expenses, which will broadly introduce a $2,000 annual cap on the amount of education expenses that can be claimed as a deduction, as set out in the Reform to deductions for education expenses Discussion Paper May 2013.
The NTAA represents in excess of 8,000 tax agent member firms, who in turn attend to the needs of well in excess of a million Australian taxpayers (including employees and employers across a diverse range of industries). We make the following submission for and on behalf of those members and their clients, many of whom have voiced their concern regarding the proposed reform to claiming deductions for education expenses. First and foremost, the NTAA strongly opposes the introduction of a $2,000 annual cap on the amount of deductible education expenses (referred to as the ‘$2,000 education cap’). We believe there are better ways that the Government can target any perceived ‘rorting’ of self-education expense claims without resorting to the blunt instrument of imposing a cap on every single taxpayer in the country.
General observations and comments
The NTAA believes that there is an enormous benefit associated with having a highly qualified and knowledgeable work force in Australia, including increased national productivity, increased international competitiveness, and reduced unemployment rates, which together ultimately lead to an increased revenue base (and, therefore, increased tax revenue). There can be no doubt that the Government shares this view. In fact, in relation to the proposed Gonski education reforms in which the Government intends to invest over $14 billion into the Australian education system (over 6 years), the Government acknowledged this to be an investment that is “…in our national interest so that we can take economic advantage of the opportunities of the Asian century”. Further to this, the Government has recognised the importance of continuing professional development (‘CPD’) by legislating minimum requirements across many professions
As was stated in the Discussion Paper, undertaking further training to ensure a professional’s knowledge remains up to date provides a benefit “…not only to those professionals, but also to their employers and the wider Australian community”. By way of example, to maintain registration as an ‘approved SMSF auditor’, section 128F of the Superannuation Industry (Supervision) Act 1993 stipulates that the CPD requirements prescribed by the regulations must be completed. In this regard, Regulation 9A.04 of the Superannuation Industry (Supervision) Regulations 1994 requires the following: 9A.04(2) The approved SMSF auditor must undertake at least 120 hours of continuing professional development every 3 years. 9A.04(3) The development must:
(a) include 30 hours of development about superannuation at least 8 hours of which is development about auditing of self managed superannuation funds; and
(b) be development that could reasonably be expected to enhance an approved SMSF auditor’s technical skills or professional service delivery.
9A.04(4)
The approved SMSF auditor must keep a written record of the development undertaken by the approved SMSF auditor for at least 3 years after the end of the financial year in which the development occurred. It is evident that the CPD requirements of approved SMSF auditors are onerous (and for
good reason). Similar CPD requirements exist for other professionals, including:
  • Registered tax agents – 90 hours of prescribed CPD over 3 years (10 hour minimum in each year). Refer to section 30-10 of the Tax Agents Services Act 2009 (‘TASA’) and TPB (EP) 04/2012 Continuing professional education (Explanatory Paper issued by the Tax Practitioners Board).
  • Registered BAS agents – 45 hours of prescribed CPD over 3 years (5 hour minimum in each year). Refer to section 30-10 TASA and TPB (EP) 04/2012 Continuing professional education.
  • Accountants – CPD hours are determined by the relevant professional association (e.g., the ICAA requires that 120 hours of prescribed CPD over 3 years be completed).

 

We understand that annual CPD requirements exist for other professions, including for health professionals (such as doctors, dentists and physiotherapists) and soon to be tax (financial) advisers as from 1 July 2014, along with many others.
It is confusing that on one hand, the Government is purporting to be at the forefront of education policy initiatives and investment and, on the other, is seeking to introduce a $2,000 cap on the deductibility of education expenses of Australian professionals and other workers, a policy which will undoubtedly also cap the incentive for workers to undertake self-education. In this regard, we note that the Government has provided a $2,000 cap amount on deductibility of education expenses, basically in recognition of the fact that “…many professionals are required to undertake continuing professional development to maintain their licence or registration…”.
However, in our view, the $2,000 cap amount is grossly inadequate to cover the legitimate self-education costs incurred by the vast majority of professionals in meeting their CPD requirements, particularly those in regional areas who are often required to travel long distances. For example, we have determined that an approved SMSF auditor would incur annual CPD expenses of over $3,500 simply to satisfy their minimum CPD requirements, estimated as 40 hours CPD annually which would equate to around 6 full-day seminars at a cost of $600 each (note that it is not uncommon for an attendee of an NTAA seminar to incur upwards of $600, excluding travel and accommodation costs, to attend one full-day seminar, and NTAA seminars are generally at the lower end of the cost spectrum for tax professionals). One major concern we have (among others, as noted below) in relation to the introduction of the $2,000 education cap is that it is likely to result in many professionals seeking to minimise their CPD costs purely for tax reasons (given this cost is often incurred personally).
Specifically, we are concerned that this will see the after-tax cost of education become the driver of a professional’s choice of CPD, as opposed to the quality of the education and its suitability for the professional or worker in question. In our view it is preferable for the tax system to provide full support, as it does currently, so that professionals and other workers are in a position to select superior, targeted, education options. NTAA response to specific questions raised in the Discussion Paper We have addressed a number of the specific questions raised in the Reform to deductions for education expenses Discussion Paper May 2013.
Are there any unintended consequences from the proposed reforms? We believe that there are a number of worrying unintended consequences which
may potentially arise from the introduction of the $2,000 education cap (as proposed). We note the following: Inequity for sole traders Paragraph 56 of the Discussion Paper states that “To reduce incentives for people to restructure their affairs to avoid the cap on education expense deductions and ensure equal treatment between employees and sole traders, the cap will apply to sole trader taxpayers with respect to their personal education expenses. However, the cap will not apply to training or education expenses they may incur for their employees.” Therefore, it is clear that the $2,000 education cap (as proposed) will apply to a sole trader, but it does not apply to an employee (where the expense is paid by the employer). This includes circumstances in which a taxpayer operates their business through an entity (thus creating an employment relationship) and the self-education expenses are simply incurred by the entity (i.e., they are not paid pursuant to a salary sacrifice agreement).
In other words, it appears that taxpayers who operate through companies or trusts (and are employed by these entities) will effectively not be subject to the $2,000 education cap. By way of example, in Example 3 of the Discussion Paper, Yanthe, a sole trader, incurs $15,000 in respect of a work related conference. She is only able to claim a deduction of $2,000 as her expenses are subject to the $2,000 education cap (though Yanthe can claim a full deduction for education expenses incurred for her employee without reference to the cap). In contrast, had Yanthe instead provided her services through, say, a company of which she was an employee, the company (i.e., ‘her’ company) is able to claim a full $15,000 deduction in respect of the (overseas) conference.
This assumes that Yanthe is able to incorporate and, further, that the conference was not paid pursuant to a salary sacrifice agreement. Refer also to Example 4 14of the Discussion Paper, which supports this outcome. We are concerned that, by capping individually incurred self-education expenses at $2,000, but not those paid for by an employer, the Government is legislating inequitably differential treatment amongst different taxpayers depending on how their businesses are structured.
Furthermore, it seems that, whilst imposing the $2,000 education cap on sole traders will remove the incentive for an employee to restructure so as to operate as a sole trader (as is intended, per paragraph 56 above), it will also create an incentive for sole traders to restructure their affairs to provide their services through an entity in order to create an employment relationship. It is expected that this element of the rules alone may force (and ultimately reward) taxpayers to operate through interposed entities, although it should also be noted that restructuring is not an option for some sole traders (who are legally not permitted to provide their services through an entity) and, in any case, restructuring an entity is often a costly exercise, possibly leading to further inequity. The $2,000 cap amount creates inequities for regional taxpayers There is little doubt that the proposed $2,000 education cap discriminates against taxpayers who live in regional Australia.
For example, many NTAA members reside in regional areas. In order to satisfy their CPD requirements, these members often choose to attend CPD seminars (including those conducted by the NTAA) and, in order to do so, are required to travel into various capital cities. Depending on the distance involved and whether the seminar is conducted over multiple days, in addition to travel expenses, the member may also be required to fund accommodation costs. In these circumstances, our regional members will incur far greater expenses associated with self education when compared with their city-based counterparts. In many cases, these members will fully utilise their $2,000 education cap simply on the basis of travel expenses associated with the self education alone. Unfortunately, the inequity for regional taxpayers is not limited to professionals. Consider an apprentice (e.g., a plumber, electrician or builder) who lives in regional Australia and is required to attend trade school as part of their education and training. The costs of attending trade school, and the associated travel and accommodation costs, are commonly borne by apprentices themselves and, as above, the travel and accommodation expenses incurred by such a taxpayer alone will more than likely absorb the $2,000 cap, leaving these taxpayers (who can least afford losing the education deduction) further out-of-pocket for living in regional Australia. The $2,000 cap amount creates a culture of mediocrity Imposing a low $2,000 education cap on thedeductibility of education expenses provides a disincentive for taxpayers to undertake any work-related education that is in excess of their minimum CPD requirement.
The NTAA is concerned that by adopting a tax policy that does not fully support workers to developtheir skills through CPD, the Government risks creating a culture of mediocrity, an outcome that is most certainly not in Australia’s national interest. The NTAA strongly argues that it is preferable for the tax system to fully support those who strive for excellence in their field by undertaking further work-related training and this can only be achieved by ensuring that the deductibility of work-related education expenses is not capped at an unrealistic amount.

This is important both for Australia’s long term international competitiveness and also to reduce the risk of consumers receiving a substandard service in the marketplace in years to come. Are there alternative approaches that you would like to see considered? How would they work in practice and are there any precedents in Australia or other jurisdictions? If the Government is to proceed with amending the law despite the concerns of the NTAA anda growing number of other interested parties, we believe that, for the reasons set out above, it is imperative that any such amendment continues to allow professionals and other workers to claim deductions for legitimate education costs. In this regard, we note the following alternative approaches: Alternative approach 1 – Apportionment of education travel costs Amend the law to ensure that taxpayers must strictly apportion all self-education expenses (including travel and accommodation costs) so that deductions are only claimed to the extent the costs were incurred in gaining or producing assessable income (or were necessarily incurred in carrying on a business). That is, there should be no scope to claim private

benefits, incidental or otherwise (with the exception of employers where FBT is paid by the employer in respect of the private benefit).
To that end, we recommend that apportionment of expenses such as travel, accommodation and meals be undertaken on a ‘days basis’. That is, we suggest that the law be amended to only allow a deduction for the actual days that a taxpayer attends a conference, seminar
or other CPD activity. Under this approach, no deduction would be available for any days on which the taxpayer participated in private/ recreational activities. This amendment would ultimately mean that all travel, accommodation and meal costs would be apportioned on the basis of an arbitrary calculation that limited deductibility to the days in which education, conferences or other CPD activities were attended by the taxpayer. Such an amendment would remove the ability of a taxpayer to add a holiday onto an education-related conference without the need to apportion the travel and accommodation costs.
For example, if a taxpayer travels to undertake self-education, to the extent the taxpayer undertakes recreational activities whilst away, there should be appropriate apportionment of the travel and accommodation costs (notwithstanding the primary purpose of the trip was for self-education). Introducing such a legislative amendment would remove the ability of a taxpayer to attach a holiday at the end of a business trip without the need for the taxpayer to apportion their self education expense claim. We believe this offers a more targeted, effective, solution to the Government’s concerns. In addition, this would not involve any disparity in the treatment between sole traders and employees, and regional and city-based taxpayers.
Alternative approach 2 – Overseas conferences/CPD
It seems the Government is particularly concerned about taxpayers claiming substantial self education expenses that entail first-class airfares, 5-star accommodation and holidays.
On this basis, it may be appropriate to introduce a cap on the education deductions that can be claimed in respect of these types of ‘indirect’ education expenses (whilst maintaining the deductibility of ‘direct’ education costs, such as the cost of courses undertaken to fulfil CPD requirements). Alternatively, the Government might consider specifically targeting overseas travel costs. For example, it may be appropriate to amend the law to ensure that taxpayers are only entitled to claim airfares equal to the economy airfare (although the administrative logistics of this suggestion may be problematic), or to ensure that taxpayers are only entitled to claim overseas self education expenses that relate to structured courses. This latter amendment to the Tax Act would eliminate the ability of taxpayers to claim overseas ‘self study’ tours (such as academics claiming a deduction for overseas sabbatical tours, or taxpayers undertaking their own overseas employment-related tour), which should serve to address some of Treasury’s criticisms of the self education rules.
The NTAA believes that both of the alternative approaches noted above are appealing because they offer a more targeted response to the Government’s concerns whilst still allowing the tax system to support taxpayers who incur legitimate education costs. Further to this, both approaches avoid complex amendments to the PSI rules and to Division 40 (in respect of depreciating assets used for education purposes), as otherwise contemplated by the Discussion Paper. Editor: We also recommended that the $250 ‘no claim threshold’ under S.82A of the ITAA 1936 be removed, as it is basically an unnecessary anachronism; i.e., the reason for its initial introduction no longer exists and it has shortcomings in the way it operates. Therefore, since it causes unnecessary complication, we submitted that removing it would increase efficiency, even if it affected  revenue. We are having on-going talks with the government (and the opposition), and hopefully sense will ultimately prevail!

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