Prime Minister Julia Gillard’s reminder to parents this week to “keep your receipts” fails to acknowledge the difficulties many Australian families face in managing their personal finances.
The Prime Minister was encouraging parents to make use of the Education Tax Refund (ETR), after reports that hundreds of thousands of eligible families did not access this important entitlement during the last financial year. The Age newspaper recently reported that up to 400,000 families missed out on almost $400 million because they did not claim the ETR.
The ETR was introduced in 2007, following the election of the Rudd government. It allows parents to claim 50 per cent of a range of primary and secondary school education expenses as a tax refund. Eligible expenses include textbooks, home computers and internet connection fees. This week, the Prime Minister announced that the ETR would be extended to school uniforms, acknowledging that uniform costs are often an essential expenditure that can disable household budgets particularly at the beginning of new school years.
Government policy aiming to improve access to education is laudable and many struggling parents will welcome further offsets to the increasing costs of uniforms and textbooks. Brotherhood research from 2009 found that there is a significant cost to a “free” public education. A survey conducted with parents found that the annual price tag can be as much as $3,642 for primary school students and $3,928 for secondary school. Participation in education is crucial to ensuring young people have the personal capacities to participate in society, and support to help them do so is imperative.
However, the delivery of such support through a tax refund does not recognise literacy levels in the community or the actual financial management behaviour of households.
Research from the Australian Bureau of Statistics on literacy and life skills has found that 46 per cent of 15-74 year olds, or some seven million Australians, would struggle to understand documentation such as job applications, maps and taxation refund forms. Fifty-three per cent of surveyed Australians reached just the second of five levels in a practical numeracy test, while 70 per cent (about 10.6 million people) managed only to progress to level 2 in a series of problem-solving exercises. Level 3 is regarded by the survey developers as the minimum necessary for an individual to meet the complex demands of everyday life and work in the emerging knowledge-based economy. Given these findings, requiring people to be able to understand and complete the necessary paperwork and processes might be too high an expectation.
Moreover, the reality of complex lives means that personal financial management is very difficult. Behavioural analysis tells us that intentions (for example, to save receipts for tax-time) do not always translate into actions. Personal financial management - regardless of one’s income level - includes frequent decision-making challenges about spending, saving and planning. It requires the ability to predict and plan for the future and, in the context of the ETR, the ability to incur expenditure upfront with the knowledge that some amount might be refundable when tax-time rolls around.
Behavioural research, however, suggests that people are in fact very present-oriented and are not very effective at planning for the future. A few examples of this are that:
- we have trouble following through on plans when they require ongoing conscious actions (like remembering to make savings deposits or keeping receipts);
- we over-estimate our abilities, including our ability to organise ourselves and keep records; and
- we are procrastinators: we put off taking actions that benefit us financially where they take time or effort to implement.
All of this has consequences for our financial choices and outcomes and was recently acknowledged in the superannuation system reform proposals suggested by Jeremy Cooper. The MySuper proposal responds directly to the fact that most consumers are inert and disengaged about their superannuation, but that there should still be a simple and fair product to suit their needs.
The Henry Tax Review, also, recognised that tax refunds were an ineffective method of providing support to families and children. Instead, it recommended the ETR should be incorporated into a single family payment, but be part of a “back-to-school” lump sum amount. This recommendation makes sense - it recognises that it is important for entitlements to be structured so that they are accessible and that they are relevant to particular needs at particular times. An even stronger, more targeted policy aimed at improving educational attendance and outcomes would be free public transport for school-aged children.
Henry also acknowledged that personal tax compliance has become inordinately complex, pointing particularly to the range of different tax rebates, concessions and deductions. This complexity can be even more difficult for vulnerable families. Research from the Inspector-General of Taxation has shown that those with lower household incomes are significantly more likely to be among those who are required to but do not lodge a tax return, meaning that they are less likely to claim tax concessions such as the ETR.
The Brotherhood of St Laurence believes that the entitlement system needs to respond to the actual way people manage their money. It also needs to be incorporated into a strategy that helps people move forwards financially. We have been calling for a national financial inclusion strategy, which would build financial literacy, capability and inclusion. Such a strategy should set out policies and programs that:
- provide opportunities to save and build assets;
- improve access to fair and affordable financial services;
- ensure entitlements and support systems are accessible and structured simply; and
- improve financial literacy and capability.
Policies and programs, including the ETR, need to be simple and be structured in a way that makes participation easy. Requiring people to save their receipts and fill in copious amounts of paperwork will not help vulnerable people access financial support, education-related or otherwise.