The Age this morning reports on a Federal Court judgment that opens the way for welfare recipients to claim as tax deductions expenses incurred in maintaining their eligibility for welfare.
The case was brought by Symone Antsis, a former Australian Catholic University teaching student. In the tax year in dispute, she earned about $15,000 working for the Katies retail chain and about $3,600 from Youth Allowance. In her tax return, she claimed work-related self-education expenses which included depreciation on her computer and spending on university textbooks.
The rule on self-education expenses is that the deductible expenses have to be related to your current employment. Her expenses were clearly unrelated to selling women’s clothes. But she argued that they were necessary to undertake the studies necessary to maintain her YA eligiblity, and therefore she ought to be able to deduct them.
Amazingly, Justice Ryan of the Federal Court accepted this argument:
The various eligibility and qualifying requirements for Youth Allowance cannot be satisfied otherwise than by enrolling in an educational institution, undertaking the course for the necessary proportion of the normal amount of full-time study, and, in the Secretary’s opinion, making satisfactory progress towards completing the course. If those requirements can, as the evidence in this case demonstrates, only be satisfied by the expenditure of money, then that expenditure is incurred in gaining or producing the Youth Allowance within the meaning of s 8-1 of the ITAA. That the taxpayer’s ultimate purpose or motive in undertaking the course was to acquire a qualification leading to future employment as a teacher is irrelevant to the characterisation of the expenditure. It is sufficient that the expenditure was incurred as a necessary incident of deriving the Youth Allowance.
Where would this logic stop? Should people be able to claim tax deductions for expenses likely to help them stay unemployed or disabled? Should people be able to claim the costs of producing children, so that they can continue to get family benefits (I will leave the possible expenses to the imagination)?
At one level, this will often be an academic question in many cases, since especially with low-income tax offsets many welfare recipients don’t pay any tax and therefore can’t get tax refunds.
But as a matter of public policy, the effective level of benefits should be set in the social security system, without letting welfare recipients get, via the tax system, additional benefits not available to people who have actually earned an income rather than taking a hand-out.
Andrew Norton 
i assume the government will just legislate against this
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Andrew – drscroogemcduck’s right: it’ll be patched up with legislation, no doubt.
FWIW, I can’t see why anyone would get annoyed over someone claiming deductions over textbooks. They’re improving their knowledge and skills and improving the quality of the labour pool.
Still, who am I to get in the way of your downward envy rant, eh?
Andrew wrote: “without letting welfare recipients get, via the tax system, additional benefits not available to people who have actually earned an income”
What makes you suddenly unable to claim for income related expenses? Maybe you should find another accountant.
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I actually don’t have a major problem with the reasoning. The expense is directly incurred to earn the income. But as a matter of policy, I agree that the government should legislate to overturn this decision. Mind you, I also think childcare expenses should never have been made deductible.
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This is just another example of income/deductions symmetry, or if you like that you can’t have your cake and eat it too. The more famous one is the case of de la Rosa where the ATO sought to tax Mr De la Rosa on his presumed earnings from drug trafficking.
Mr De la Rosa then claimed a deduction for the heroin stolen from his backyard, and the Federal Court upheld it – if it suits the Cth to assess you on the income, then prima facie your ordinary expenses in the derivation of that income are deductible.
Note that in that case the parliament did change the law. The income would still be assessable but the expenses non-deductible if in furtherance of an illegal entreprise. So presumably the commenters are right and this will go the same way.
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I agree with Rajat – this is a straight forward application of a well-known tax principle.
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In fairness to Andrew’s position though, my recollection from tax law was that courts do impose policy-based limitations on expense deductibility of their own. For example, there is no obvious legal reason why buying suits for an office job or travel costs between work and home should not be deductible. These are viewed as personal expenses even though one would not need to incur them if one weren’t going to work. I personally would prefer the legislature to determine the tax deductibility of expenses as far as possible rather than leaving it to courts.
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On the policy issue, I think my view is the correct one. On the legal issue, the ATO’s arguments at paras 43-44 refer to the arguments Rajat makes – essentially, the courts seem to have tended towards a narrow reading of the legislation to exclude incidentals. I agree that this is less amazing than I first thought, but statute should remove this unintended outcome.
Another interesting angle to this story is the sense of entitlement again being revealed, with Anstis covering her actions in the rhetoric of justice and fairness, even though this precedent means that people on YA get deductions against their market income not available to people not on YA, and at the expense of other taxpayers.
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This wouldn’t even have arisen if income support payments weren’t generally taxable. Perhaps you could look at that broader question (as is the Henry Review – Q4.4 in the consultation paper)?
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Spog – I think this depends on the payment. FTB is not taxed, as it is intended as a permanent increase to family income for those with dependent children. However, other payments such as YA or unemployment benefits go to people who may require only temporary income support and actually earn much more in a financial year. With students, this will happen quite a bit, especially for those (the majority) who finish their courses and start full-time work half way through the financial year.
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“there is no obvious legal reason why buying suits for an office job or travel costs between work and home should not be deductible”
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Strangely enough, I believe that if have an accident traveling to work, it can be considered a workplace accident, which appears to be the opposite ruling as the travel cost to work.
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Conrad – I understood that the classification as workplace accident for a person who has an accident travelling to work was removed a couple of years ago (i.e. you can no longer receive workers comp for such accidents but you can receive compo if you are travelling between two work related events).
Can anyone confirm (it may only apply to federal public servants)?
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Conrad – you’re a University employee. Many uni’s in the last EB round took out travel insurance for staff going to and from work.
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The question is whether studying counts as employment.
If yes, then books, etc.. should be tax deductible.
If not then no.
Or does it only count as employment if you are eligible for YA and getting paid to study?
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The argument is not that studying is employment or linked to employment. Rather, being enrolled and meeting progress standards is a condition of receiving income under YA, and therefore expenditure aimed at meeting YA eligibility conditions is, according to this judgment, deductible. People not on YA would not be able to claim because the link is to the YA eligibility criteria, not studying as such.
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