Tax deductions

Tax deductions favor those who “play” with the system. Standard deductions could help


Those who claim a standard deduction argue that it creates simplicity.

For many Australians, tax filing can be extremely complex and taxpayers must keep detailed records and receipts to substantiate their claims.

It’s no surprise that the majority of people who object to a standard deduction are accountants. They argue that the system should not deter Australians from being able to legally claim the maximum refund to which they are entitled.

Although the tax office estimates that many Australians are claiming more than they are entitled to.

He did random audits of a sample of taxpayers and it’s best to assume that this lost revenue runs into billions per year.

It can also be costly to change the status quo, and not just in terms of the direct impact on income.

As Kevin Rudd discovered with his ill-fated plan for a standard $ 500 deduction, changing the rules for work-related deductions could lead to behavioral changes.

In a submission to the 2016 Standing Economic Inquiry Committee on tax deductibility, the Treasury warned that the change could “further incentivize, to the extent possible, employees to re-qualify as entrepreneurs.”

Entrepreneurs are essentially sole proprietorships that can deduct work-related expenses as business expenses and deduct them from their income.

The Treasury also warned that any changes to deduction provisions should take into account the Employee Benefits Tax System (FBT), which allows certain benefits to be provided by employers to employees.

But even if the standard deduction proposal doesn’t increase that federal budget, don’t be surprised if the rules about what people can and can’t claim are tightened.

Australians treasure their tax deductions

Three-quarters claim tax deductions totaling $ 37 billion per year, of which 70 percent use an accountant to file their return.

The average total deduction is $ 2,576, although half of all taxpayers claim less than $ 674.

The majority of the $ 37 billion claimed is for work-related expenses.

Statistics from the tax office show that in 2017-18, nearly 9 million taxpayers claimed a total of $ 21.7 billion in work-related expenses.

But look deeper into the data and you’ll find that the bulk of the deductions don’t just go to higher income people, but specifically to higher income men.

The average high-income woman (earning more than $ 100,000 per year) claims fewer deductions than a man earning the same income.

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This difference is in part due to the occupations in which men and women are employed and the type of deductions they claim.

For example, women are proportionately more likely to work in administration. Men, on the other hand, are more likely to be in trades, laborers or machine operators.

Relaunch the idea of ​​the “standard deduction”

Think tank Blueprint Institute this week re-launched calls for a standard tax deduction set at $ 3,000.

The idea was first launched in the Henry Tax Review and gained attention under the Rudd government.

Then-treasurer Wayne Swan announced a standard deduction of $ 500 for workplace expenses in 2012-13, rising to $ 1,000, but it never saw the light of day. Ultimately, the cost was seen to outweigh the benefits.

The idea was put on the table again two years ago by the tax mediator.

The Inspector General’s review of the future of the tax profession said such a move would make it easier for millions of Australians.

Under Blueprint’s plan, the standard $ 3,000 deduction would be claimed automatically – people would simply submit an already pre-filled form rather than spending hours filling out their tax returns.

The think tank says the change would see 80% of taxpayers get a “tax cut” of $ 400 to $ 600 per year. He estimates that this would reduce federal tax revenues by about $ 5 billion per year.

For the 20 percent of taxpayers with high work-related expenses, they would still have the option of filing a full tax return and potentially getting a larger return.

Under his plan, gifts, donations and personal pension contributions could still be claimed in addition to the standard deduction of $ 3,000.

His reasoning is that there is “a social interest in maintaining public support for charities”, and that the inclusion of personal super contributions in the standard amount “would conflict with the conceptual basis of the super system as a vehicle. savings before tax ”.

A golden egg in a nest symbolizing retirement.
Under the Blueprint Institute plan, pension contributions could be claimed in addition to the standard deduction of $ 3,000.(ABC News: Alistair K Crossed)

According to his report, “some taxpayers at the margin will choose the standard deduction even when their expenses exceed $ 3,000 to reduce their compliance costs.”

He estimates that about 3 million taxpayers with deductions greater than $ 3,000 would continue to itemize.

He also argues that a standard deduction would narrow the gender gap, as it would equalize deductions between half of the highest-earning men and women who opt for politics.

“Low-income women tend to claim a little more than low-income men, so [they] have a little more to gain from politics, ”said Institute chief economist Steven Hamilton.

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“High-income women have a lot more to earn than men, but there are a lot less of them.

Homework demands on the rise

The institute’s proposal comes at a time when more Australians are working from home due to the COVID-19 pandemic and demanding more work-related tax deductions.

Accountants have reported a dramatic increase in the number of people calling for home office equipment and electronics amid COVID lockdowns. The trend of people working from home is here to stay.

In response to the increase in the number of people working from home during the pandemic, in April of last year, the Australian Tax Office (ATO) announced a new “shortcut” where people could claim 80 cents of the hour for all of their operating expenses, rather than having to calculate costs for specific operating expenses.

At the time, accountants warned that many people could seriously compromise themselves and get lower repayments by using the shortcut method.

But they predicted that many people would still choose the shortcut because they wouldn’t need to provide detailed documentation like they would if they wanted to use traditional claim methods.

The Blueprint Institute has also suggested tightening the rules of deduction, saying “the vagueness of the criteria for deduction leaves it exposed to intentional play of the system.”

He said Australia’s loose demands were out of step with those of comparable countries.

Other countries, he argued, have stricter, narrower and clearer requirements that limit spending to what is necessary and exclusive to income generation.

For example, New Zealand generally does not allow any deduction for work-related expenses for employees. He removed them in the late 1980s to broaden the tax base and finance a reduction in personal income tax rates.

In Great Britain, reimbursable expenses must meet a strict criterion of commitment “wholly, exclusively and necessarily in the performance of the duties of an employee”.

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In Britain, reimbursable expenses must pass a rigorous test.(Nerivill: public domain)

Australian governments have already considered the New Zealand model, which removes tax deductions and lowers personal income tax rates. This option may be reviewed at some point.


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