Date posted: 5/03/2018 5 min read

Work-related deductions. Is trust breaking down?

Recent comments by ATO Commissioner Chris Jordan before Senate Estimates once again highlight the difficulties associated with Australia’s tax rules for work-related deductions.

In brief

  • Difficulties associated with Australia’s tax rules for work-related deductions
  • ATO data and audits indicate that more Australians than ever are pushing the envelope

Seems to me we have two options: continue with the current law or change it. 

Looking at the first option, Australia’s self-assessment system trusts taxpayers to get their tax calculations right. 

Tax agents are trusted intermediaries and they in turn foster trust in their client relationships. 

If a client looks you in the eye and says they have a home office used for work, the tax agent doesn’t conduct an on-site inspection.They trust the client and apply ATO guidelines for calculating the deduction.”

But ATO data and audits indicate that more Australians than ever are pushing the envelope. In some cases, tax agent prepared returns have also been found wanting.

The cost to revenue trend is up, and a yet-to-be released ATO Tax Gap report for individuals may reveal a number which surprises the community.

At an individual level however, some Australians see the over-claiming of deductions as a victimless activity and certainly not a crime.

Chartered Accountants hear all sorts of justifications. 

In a low wage growth society with rising costs like electricity and tolls, it’s tempting to gild the lily and go for a larger refund.Some cite the amount of tax paid by big companies and the wealthy, or point to those paid cash under the table. 

Wasteful government spending and politicians rorting their expenses comes up often in conversation. 

But the bottom line is that all of us should only claim deductions to which we are legally entitled. 

So come Tax Time 2018, expect a big ATO education campaign on work-related deductions. 

Tax agents will be asked to probe a little deeper and check substantiation records have been kept. That could put pressure on agent business models – think risk procedures, client engagement and sign-off letters, increased time spent per client visit, and fee settings.

Those who lodge their own tax returns online will find more ‘prompts’ questioning claims.

ATO taxpayer audits (“random” but based on data analysis) will continue to gauge whether compliance has improved.

But if the upward trend of deductions claimed continues, the time will come when Government can no longer tolerate the cost to revenue. 

Denying work-related deductions altogether is a big challenge however, particularly because of different employment arrangements in our community. For example, some employees are reimbursed legitimate work expenses whilst others get no support and must pay for work items themselves.

Another complication is the “compare the pair” problem: the tax treatment of an individual employee compared to an individual self-employed person. 

Do you have any policy suggestions on the deductions front? 

In recent submissions, Chartered Accountants ANZ has raised:

  • Abolishing work-related deductions altogether in return for a standard taxpayer allowance reflected in PAYG withholding calculations (take home pay) 
  • Disallowing mixed-purpose expenditure such as laundry and home office expenses

Political advisers know that any law change impacting those who contribute the bulk of Australia’s tax revenue will require a trade off in the form of wage increases or tax cuts.

As James Freeman Clarke said, the difference between a politician and a statesman is that a politician thinks about the next election while the statesman thinks about the next generation. 

I trust that one day a brave Treasurer will put to working Australians a grand, fair tax reform bargain which addresses not only work-related tax deductions, but other shortcomings which threaten the sustainability of Australia’s tax system. 

What say you Mr Morrison and Mr Bowen?

2017-2018 Additional estimates

View the program dates the Senate Estimates

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