Australia's Future Tax System

Architecture of Australia's tax and transfer system

7.6 Incentives to improve skills

In the same way the personal tax‑transfer system can influence an individual's decision to work, it can also influence the decision as to the type of work an individual undertakes. Skills and education are a major determinant of the hourly rate of earnings. Acquiring these skills and education is costly, both in terms of forgone income while learning and in direct costs of tuition. Improving skills is therefore an investment decision, and the tax transfer system acts both to subsidise the cost of this investment (directly and indirectly) and to reduce the after‑tax return from it.

Youth Allowance, Austudy and ABSTUDY are the main means of supporting an individual's participation in education and training. Youth Allowance, Austudy and ABSTUDY are means tested payments that provide some $2 billion annually and support 320,000 students (as at June 2008). There are many other ways in which both the States and the Australian Government subsidise the more direct costs of education and skill acquisition. In the 2006‑07 financial year, the Australian Government provided the university sector alone $5.86 billion while the States provided $508 million (ABS 2008b). The Higher Education Loan Program is also important for many people choosing to undertake further study.

As noted in Section 2, self‑education expenses that are directly linked to the individual's existing career are deductible. In 2005—06 over $834 million was claimed as self—education expenses (Chart 7.14). These costs are not deductible if the new skills are for a new career direction.

Loss of income can be seen as a form of personal investment, the cost of which is in effect deductible (equivalent to a post‑paid expenditure tax — see Box 6.1) and so treated concessionally relative to other forms of capital investment, especially when subsidies are included.

Chart 7.14: Total self‑education expenses

(average claim and percentage of claimants per income range in 2005‑06)(a)

Chart 7.14: Total self-education expenses (average claim and percentage of claimants per income range in 2005-06)(a)

  1. Average deduction does not include taxpayers who do not claim self‑education expenses.

Source: Australian Government administrative data.

The net effect of the personal tax‑transfer system on the return to the individual from improving their skills and hence the incentive to invest in skill formation is very difficult to determine.