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Working parents will now be allowed to deduct their childcare expenses from their taxes, the Supreme Court ruled yesterday, upholding a Tel Aviv District Court decision.

Court vice president Eliezer Rivlin wrote the opinion for the expanded five-justice panel.

Rivlin wrote that childcare expenses were a necessary expenditure to allow parents to work and earn an income, and "are a necessary result of natural parental responsibility for their children."

The original case was brought by attorney Vered Pery as the plaintiff; Judge Magen Altuvia of the Tel Aviv District Court ruled in her favor last April. The Israel Tax Authority appealed the ruling to the Supreme Court and refused to implement the lower court's decision until the higher court decided on the matter.

Pery told TheMarker yesterday she had expected the court to uphold the ruling, saying it was the correct thing legally, economically and socially. "It's an incredible feeling. I have been told I've made history. This decision changes the tax authority's way of thinking and proves that sometimes you have to stand firm," said Pery.

The Finance Ministry and the tax authority had been fighting the ruling with all their effort, including attempts to frighten the court, saying such a ruling would cost billions of shekels the state cannot afford. The state even asked the court to hear testimony from Finance Ministry director general Yarom Ariav, but Justice Miriam Naor made it clear that budgetary considerations would not influence the court and the request was improper.

However, the treasury did win a major concession: Rivlin's ruling stated that the deductions would start only in January 2010 and not apply retroactively - except for one person - Pery, who brought the case on her own behalf.

The tax authority said yesterday it would study the ruling before responding; according to estimates, the ruling will cost around NIS 2 billion or NIS 3 billion a year to implement. The treasury had estimated that if the new ruling were applied retroactively, costs could reach NIS 20 billion. Justices Naor and Esther Hayut were of the opinion the law should apply retroactively, while justices Elyakim Rubinstein and Edna Arbel supported Rivlin's opinion.

Other parts of the ruling limit its scope. For example, both parents must work and be unavailable to care for the children. It applies only to direct expenses like daycare, nannies, babysitters, nursery schools and kindergartens during work hours, but does not apply to day camps. It also does not apply to other activities such as enrichment activities or classes.

Rivlin's opinion takes care to keep to the letter of the law, saying the consideration of encouraging women to enter the workforce was not the goal that guided the decision; it was not even a secondary consideration. He wrote that the main consideration was to levy income tax correctly according to the law.

To overturn the decision, the Finance Ministry's only hope is to change the law in the Knesset, a possibility the justices mentioned. But the tax authority and treasury do not have high hopes for such legislation, as most MKs favor the ruling. The tax authority could also ask the court for a new hearing, but the chances of that are slim.