On Friday 7.5.21, The Tax Institute’s Director, Tax Policy and Technical: Andrew Mills, published a Report in their weekly TaxVine newsletter (#16), about the ‘work related expense’ debate – and in particular, a not new idea of having a standard deduction (set as high as $3,000 this time) with an option to claim higher deductions, if applicable. Andrew examines who’s raised this idea again, how it ought help, but not change tax agent’s practices all that much.
See below for further details.
Blueprint Institute report ‘Bye-bye tax returns’
The media has had a number of articles of late talking about ideas for dealing with work-related expenses (WRE). This follows from a report released and forum discussion hosted by Blueprint Institute.
Blueprint Institute is a relatively new thinktank that, since mid-2020, has produced seven reports on a range of different topics. ‘Bye-bye tax returns’ is their first report solely in the tax space, although some of their other reports have touched on tax policy.
While some members may find the thrust of the report concerning, the ideas are not wholly new but do take an additional twist.
A standard WRE deduction would save time and money on tax returns
In essence, the report argues that a lot is spent on completing tax returns in fees to accountants and tax agents, as well as for the ATO in its administration. The outcome that Blueprint Institute argues is available is ‘lower, simpler and fairer taxes’ through the introduction of a standard WRE deduction.
While some of the numeric analysis is open to criticism (there seems to be a conflation of numbers in some cases), the point is correctly made that a lot of time and effort is used to comply with the WRE rules and administer them. Some data on ATO expenditure seems to overlook how much of the activities related to tax administration of individuals is automated, which results in relatively low costs of administration given the size of the individual taxpayer population.
The report helpfully identifies the number of other countries that have moved to standard deductions or credits. The Blueprint Institute proposes a standard $3,000 deduction, with an option for those who wish to claim actual expenses (this would be of interest only to those with greater than $3,000 in WRE). In addition, Blueprint would pair this actual expense option with tighter requirements being that the expense is both necessary to fulfil requirements of employment and solely related to income earning — the model the UK has had for many years.
Does all this sound vaguely familiar?
Many practitioners will recall some previous ill-fated attempts to move to a standard WRE deduction.
For example, in May 2010, the then Labor government proposed that, with effect from 1 July 2012, individual taxpayers would have an optional standard deduction of $500 (increasing to $1,000 from 1 July 2013) in lieu of claiming work-related expenses and the cost of managing their tax affairs. Note the word ‘optional’. It was proposed that, should a taxpayer wish to claim a greater deduction, they would still be able to do so. This, of course, came from a recommendation of the Henry Review (Australia’s future tax system, 2009) nor the proposal was ever implemented.
The government’s 2015 Re:Think Discussion Paper also sought feedback on whether a standard deduction should be adopted for WRE.
Further, in 2016–17, the House of Representatives Standing Committee on Economics conducted an enquiry into tax deductibility including WRE. In the end, they concluded in their June 2017 report that there be no change to WRE deductibility.
What has been TTI’s position on WRE?
Since at least 2015, The Tax Institute has been arguing that the current system for WRE should be replaced with an optional standard deduction. There are considerable costs incurred by taxpayers and their agents in detailing large numbers of small expenses, following ATO guidance on ‘shortcut methods’ for various expenses (e.g., working from home expenses) and dealing with ATO audits of such claims. Other options that have been suggested for investigation have included abolition of WRE (together with an income tax cut).
The impact on tax practitioners ought not be that adverse
Contrary to the conclusion that Blueprint Institute seems to come to, we do not think that the introduction of an optional standard WRE deduction would change the practice of around 70% of taxpayers from using a tax agent.
- Many individuals will be interested whether they are entitled to more than the standard deduction. Those taxpayers will still want to see a tax agent.
- There are many taxpayers who’s deductions are not limited to ‘work related expense’ deductions, and would still need to lodge a tax return.
- The ATO reports that, in 2017–18, over 2.2 million people returned income and expenses from rental property.
- Nearly 3 million people returned dividend income.
- Over 3 million people received partnership or trust income,
- Over ¾ million people had foreign income and
- A similar number reported a net capital gain.
Most of those people will want to see a tax agent. Even considering the potential overlap between those different categories, these numbers are significant.
Conclusion
So, while there may be little change to the number of people seeking tax advice, a standard deduction for WRE is likely to make both practitioners and taxpayers lives much easier. Nonetheless, it is unlikely that there will be the savings to the system that Blueprint Institute suggests, although there is likely to be a reduction in ATO administration costs and angst for everyone.
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