Childcare Tax Deductions Questions and Answers

National will introduce a new tax deduction for pre-school childcare costs to ease the financial pressures on parents, particularly on second-income earners and employed sole parents.

National will provide a tax deduction of up to $5,000 per child for out-of-pocket pre-school childcare costs, deductible at 33%. Effectively, one third of childcare costs can be claimed back, reducing tax liability by a maximum of $1,650 (one third of $5,000) per child.

The new policy will take effect on 1 April 2006, and will cost an estimated $160 million per year.

It will be based on the existing housekeeper rebate, but replace it in respect of pre-school childcare costs.

This policy is focused on making pre-school childcare more affordable for those already in the workforce, and tackling one of the barriers to employment that parents face, especially sole parents.

We consider the $5,000 deduction for pre-school childcare a starting point for a more fundamental review of family tax policy. This is the first step in a phased release of tax policy.

Will this replace existing subsidies for childcare?
No. This tax deduction will supplement existing forms of government contributions to the costs of pre-school childcare, but can only be claimed on actual expenses.

Funding for childcare centres and childcare subsidy rates will remain the same. This deduction will complement those systems by providing parents with flexibility in their childcare choices.

Who will be eligible for the tax deduction?
Working parents who face childcare costs will be eligible for the deduction. Eligibility will be based on the existing housekeeper rebate. This new deduction will replace the housekeeper rebate in respect of pre-school childcare costs.

Isn’t this really just a tax rebate?
The principle driving this tax policy is that we regard childcare costs as a legitimate work expense for second-income earners who would otherwise be engaged in childcare, and for employed sole parents. The deduction will be at a fixed 33% rate to make it easy for parents to claim back costs.

Does this include after-school care for the over-fives?

No, this deduction is available only for pre-school care. The next National Government will explore what more needs to be done in respect of after-school care.

What forms of childcare will be eligible for the tax deduction?
Childcare at registered childcare providers and childcare provided by GST-registered carers would be eligible for the tax deduction. Casual and informal childcare provided by adults and correctly invoiced for tax purposes will also be eligible because National recognises that formal childcare does not always align with the hours of working parents. These are similar criteria to those used to determine eligibility for the current childcare rebate.

How will the tax deduction be claimed?
Parents will need to keep their receipts from their childcare provider. These receipts will identify the out-of-pocket expenses parents have incurred. The tax deduction claimed under the Housekeep Rebate is currently able to be claimed on an annual basis, but we will explore whether this can be made more frequent.

What happens to Labour’s proposal for 20 hours free childcare starting in 2007?
That will not go ahead. The value of that proposal will be absorbed by this pre-school childcare deduction. This is a much fairer and more flexible way of delivering assistance to parents – and it is of greater value.

Childcare Tax Deduction:

Examples

Sarah and Mark

Sarah and Mark have one three-year-old child. They both work full-time and have a joint family income of $80,000 before tax. They are not eligible for a childcare subsidy and they spend about $180 a week on childcare with an annual cost of $8820.

Sarah and Mark are eligible for a $1650 tax credit.

Brad and Jenny

Brad and Jenny have two preschoolers and live in Auckland. Brad works full-time while Jenny works part-time. They have a joint family income of $60,000 before tax. They are not eligible for a childcare subsidy. Both of their preschoolers attend a local education and care centre at a cost of $72 each a week. Brad and Jenny’s total childcare bill is $3744 per child per year.

Brad and Jenny are eligible for a $1236 tax credit for the childcare costs of each of their children. They are eligible for a total tax credit of $2472.

Sandra

Sandra is a sole parent with one preschooler. She works full-time as a nurse and earns $45,000 a year before tax. Sandra’s shift work means it is necessary for her to use both a creche and a home-based carer to look after her child. Sandra is eligible for a childcare subsidy when her child is at the creche. Her total out of pocket childcare expenses are $98 a week, meaning she spends $5138 a year on childcare.

Sandra is eligible for a $1650 tax credit.

Childcare Tax Deduction:

Background

Who uses childcare?

There are more than 200,000 New Zealand families with preschoolers.

96% of preschoolers aged 3-5 are enrolled in a formal childcare service.

40% of preschoolers under age 3 are enrolled in a formal childcare service.

70,000 couples with preschoolers (50%) are dual-income earning households.

16,000 sole parents with preschoolers (30%) are in full- or part-time employment.

There are more than 280,000 children under the age of five

More than 165,000 children are enrolled in licensed childcare services.

What kind of childcare do parents use?

A wide range of choice, from part-time crèche and kindergarten, full-time private education and care providers, and home-based services.

The majority (80,000) are enrolled in licensed education and care centres (either community owned or for-profit)

Average attendance is about 20 hours per week, with attendance increasing with age.

The next largest group (45,000) attends kindergartens, for an average of 12.5 hours a week

A further 15,000 children attend play centres for an average of 4.4 hours a week.

How much does it cost?

The average weekly cost of full-time care in an education and care service is $168.

The average cost of full-time attendance in Auckland in education and care service is $200 per week.

The average cost of a nanny is $10-$18 an hour.

Care in the home of a qualified caregiver costs approximately $3.80 per hour.

Kindergartens and play centres request donations. They do not provide full-time care. Generally they provide up to five morning or afternoon sessions a week.

What funding is available for childcare?

Formal childcare services are bulk-funded by the government based on the number of children enrolled and the number of hours they attend the service.

Informal childcare providers such as nannies and non-licensed carers do not receive any government funding for their services.

Income-tested childcare subsidies are available for formal childcare:

Paid directly to the centre.

Calculated on number of pre-schoolers in the family attending formal childcare.

Abated according to income – families with one child earning more than $930 a week before tax ($48,360pa) are not eligible for these subsidies.

At least 30% of families are not eligible for any childcare subsidy.

Childcare tax rebate also available for working parents. The maximum value of the rebate is $310 if you have paid $940 or more for childcare.

The maximum rate of the rebate has not been adjusted for more than 20 years, if it had been inflated adjusted since it was last raised in 1982 it would be worth $900 today.

Do parents in Australia receive tax credits for childcare?

Yes. In January 2005 the federal government introduced a 30% childcare tax rebate. This covers 30 percent of out-of-pocket childcare expenses and is payable up to a maximum rebate of $4000 per child per year.

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