H&R Block defends tax rorting

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By Leith van Onselen

Earlier this week, Australian Tax Office (ATO) Commissioner, Chris Jordan, announced a crackdown on tax returns by individuals, noting that some 6.3 million people – or roughly half of workers – make claims for expenses relating to clothing or laundry when they have no right to do so.

Mark Chapman – an executive with tax agent H&R Block – has hit back at the ATO claiming that such a high proportion making these types of claims “appears reasonable”. From The AFR:

“The suggestion that the majority of tax avoidance is done by you, me and your readers is frankly a bit misguided,” he said.

“We just don’t see any evidence of this rorting. Statistics don’t show any big increase in claims, it just doesn’t stack up.”

The firm processes around 800,000 tax returns a year, which represents 6 per cent of all individual tax returns lodged with the ATO…

Mr Chapman said it was no “rocket science” that there were more than 6 million people claiming clothing and laundry expenses given there were at least 1.5 million people who work in the trades alone.

“We’ve got 1.5 million tradies who need work clothing, plus nurses, police officers … Basically anyone who does manual labour and operates machinery will claim the deduction,” he said.

“I’m surprised the commissioner singled out the clothing expense. It was a stupid claim”…

Mr Chapman said the increase in car and home office expenses reflected the changing nature of work where more taxpayers are working from home.

Bob Deutsch, who is a senior tax counsel with the Tax Institute, has backed the ATO’s claim of rorting:

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Deutsch said it was “simply not plausible” half the working population was claiming clothing or laundry expenses and it suggested a lot of taxpayers had misunderstood the rules.

“The rules around clothing claims are pretty strict. My suit that I wear to work is not a claimable expense,” he said.

He said $22 billion in overall work expenses appear to be a “very big number”.

It seems H&R block is talking its book here and might be concerned that the ATO’s audits could identify the firm as being party to the dodgy expense claims. Take a look around where you work. Do half of the workers wear uniforms? Other than on construction sites and hospitals, the answer is clearly no.

In any event, it has been suggested that Australia should follow the lead of countries such as New Zealand and introduce a standard amount for work-related deductions for all taxpayers. However, there is the risk that such a policy could actually raise less revenue for the Budget. From Judith Sloan at The Australian:

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This approach of having a standard for work-related deductions is used in a number of countries, including New Zealand, and its simplicity certainly has real appeal. The trouble arises in deciding what the appropriate standard should be. Should it be $500 a year or $1000 or some other figure?

For those who typically claim below the standard, the change would be a real windfall. Of course, those who see the new norm as too low for their circumstances would continue to claim deductions as they did before.

There is a real risk that the change would raise less revenue than the current arrangements, although the compliance costs would be much lower.

Any hope that setting a standard for work-related expenses could lead to much higher income tax revenue is wishful thinking. And without more revenue, there is little chance that rates of income tax would be reduced.

Whereas The Australian’s Adam Creighton argues that Australia should ditch work-related tax deductions in favour of lower marginal tax rates:

New Zealand abolished all work-related deductions in the late 1980s to pay for lower tax rates…

If Australia followed New Zealand’s example and abolished work-related deductions it could cut the 32.5 per cent tax rate to 30 per cent, and the 37 per cent rate to 35 per cent, for example.

That’s assuming, a) $24.5bn in work related deductions were claimed in 2017, b) using Deloitte Access Economics’ reckoner of the budget cost of altering tax rates, and c) assuming an average tax rate of about a third applies to deductions…

Apologists will argue some workers would be unfairly penalised: those who need to use their own car for work, or nurses who need special uniforms, for instance.

However, guess what: prices and wages would adjust in time to ensure such occupations still existed. New Zealand still has nurses and truck drivers.

Employers might put their prices up to pay for the uniforms themselves, or pay their workers more to make up for the inability to claim a deduction.

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Personally, I side with Creighton on this issue and would prefer the tax system be simplified by abolishing deductions in favour of lower tax rates.

Regardless of your view, this is a policy debate that needs to be had.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.