Tax agents vow to fight $3,000 deductions cap

By Leith van Onselen

In his Budget reply speech in May, Opposition Leader Bill Shorten announced plans to impose a cap on the amount that can be claimed for getting tax returns done by a tax agent. Shorten said Labor would apply a cap of $3,000, claiming that 48 wealthy individuals had paid an average of $1 million to get their tax done in 2014-15, as a result of which they managed to get away with paying no tax.

However, accounting bodies state that the actions of a wealthy few should not penalise the 13.4 million taxpayers who are doing the right thing, and have vowed to fight the proposed reforms. From The AFR:

As the polls firm in Labor’s favour, accountants and lawyers are increasingly nervous about what the policy will mean for clients – and their own business models.

Accounting bodies say the nation’s 13.4 million taxpayers should not be denied deductions because of the deeds of 48 individuals, or 0.0003582 of the taxpaying population.

They say a cap will affect more than just the “rich” because some life events, such as divorce and redundancy, require intensive tax advice, while starting and operating a business will be more expensive.

Institute of Public Accountants senior tax adviser Tony Greco said the proposal was a “direct attack” on the profession and would not be accepted “without a fight”.

‘”Changing policy for a handful of taxpayers appears excessive and disproportionate to the perceived rare problem of claiming more than $1 million in adviser fees,” he said.

“Even your suburban accountant can clock up substantial fees trying to help a client with a complex matter”…

Mr Shorten’s cap will increase tax revenue by $1.8 billion over a decade. There will be a carve-out for small businesses with turnover of up to $2 million. Overall, 1 per cent of taxpayers or 90,000 individuals would be affected.

Back in May, The Australia Institute (TAI) released a well-argued briefing note showing the average tax deduction is just $378 and claiming Labor’s proposal would only impact the very highest income earners and would restore integrity to the tax system:

The Labor party has announced a policy to limit the deduction that can be claimed for managing your tax affairs to $3,000. The complexity of the tax system means that some people are spending large amounts of money on accounting advice to take advantage of tax loopholes to significantly reduce their taxable income. They can then reduce their disposable income further by deducting the cost of this advice. Extreme examples of this have emerged where people earning considerable amounts of money are claiming more than a million dollars for the management of their tax affairs…

About 47% of those submitting a tax return claim a deduction for expenses incurred in managing their tax affairs. While the average (mean) amount that people deducted was $378 the median was much lower at just $165. A large difference between the average and median indicates that a small minority are claiming considerably larger amounts than the average. This minority are dragging up the average…

Using the taxation statistics from 2014-15 (latest figures) we can break down how much people deducted, on average… It shows that people that have a gross income of between $180,001 and $250,000 deducted on average $832 for managing their tax affairs. The average amount deducted then rises to reach $12,657 for people earning more than a million dollars…

High income earners who have managed to reduce their taxable income to below the tax free threshold deduct even more for managing their tax affairs. These high income earners have found deductions that are large enough that they do not pay tax.

Figure 2 shows the average deductions for managing tax affairs for those with large gross incomes who paid no tax…

If we look at the top 50% of tax payers by gross income we see that people in most income brackets deduct very little for managing their tax affairs. It is only those on very high incomes that claim considerable amounts.

This graph shows that only those on very high incomes are likely to be negatively affected by restricting deductions for managing tax affairs to $3,000…

This appears to be a policy no-brainer.

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  1. “…those with large gross incomes who paid no tax…”

    The fact that such creatures exist and that the law facilitates their bloodsucking is a gross blot on our society.

    • Philly SlimMEMBER

      Agreed. Time for an AMT (alternative minimum tax). They have it in the US and I got stung by it nearly every year I was there.

      Look at your gross income before deductions and apply a minimum rate. Essentially they are limiting how many deductions you can get.

  2. I don’t care either way.

    But I would observe that the tax agents getting those $1m fees are probably paying tax on them.

      • I’m sure they do. I know they do.

        That’s not the point that I’m making. The point I’m making is that the $1m is a complete sideshow.

        The problem isn’t that someone is getting a deduction for $1m (which is worth about $500k, say) – they’re not paying that much to get a deduction – blokes who can pay $1m for tax advice aren’t your typical fumbass negative gearing infestors who get horny over a tax deduction and don’t understand what it means.

        The tax advice that $1m buys of course is worth much more than $1m in tax saved, over time. As long as hat continues to be the case, people will continue spending $1m on advice… tax deductible or not.

    • Agree – this policy is all about Shorten’s inequality narrative and very little about real budget savings. The graphs say it all; for people earning over $1m pa (and there are 8,500 of them in Australia according to ATO 2015 stats) with an average deduction of $12K, the total impact on the tax system is around $50M p.a., hardly a major or even noteworthy tax policy coup. There is much more cost to the system from the middle income bands spending $350 p.a. on tax advice – why not address that – or is it OK to get an “acceptable” amount of tax advice?

  3. might i venture to suggest government should start looking at the way they are spending the money they receive, rather than tipping every man woman and child upside down to shake them for change ???

    • I’d like to think that the government should be capable to do both planning sensible expenditure and ensuring fair taxation. With regards to the latter, it is exactly that tax avoidance that forces the ATO to go every after penny. I’m pretty certain – but don’t have the data at hand – that if wealthy tax residents paid their fair share, EVERYONE’S tax bill could come down…

      • ”I’d like to think that the government should be capable to do both planning sensible expenditure and ensuring fair taxation.”

        I’d like to think that too!

    • Exactly – if you start squeezing people this much, what is the incentive to bother waking up and going to work? We may as well sit in cafes all day like Eastern Europeans do.

  4. Such a bad idea.

    Just because someone has a number of investments and a complex tax structure, it doesn’t mean they’re evading/avoiding tax payments.

    • They add a lot of “grey” those big 4 accounting firms.
      And being “self assessment”, with the ato having few resources = happy days

    • Exactly my investments are held through Guernsey and Bermuda because of the booming market for baked goods in those locations.

    • Philly SlimMEMBER

      A “complex tax structure” is usually to minimise tax. Otherwise why bother?

      This is a great idea.

      • was it not old mate’ packer who said “Government don’t spend their money so well that you should pay any more than you have to”?

    • “[…] a number of investments” paid for, in part, by every other tax payer? Are those investments in productive assets that generate wealth for the nation by providing employment, goods and services (and downstream taxes)? Or are those investments in useless bricks and mortar?

  5. I’m a reasonably high income earner with salary component and business component; I’m associated with managing a discretionary (family) trust, I’ve got a SMSF, and my annual accounting bills are about $1000 in total for myself, my wife, and the trust, and the SMSF costs about $1500 plus about $400 in auditing fees.

    If Shorten’s tax just applies to the individual component ($1000 in my case), and not to SMSFs or to businesses or companies, (or even separately to SMSFs – $3000 for individuals and $3000 for SMSFs) then I’ve got no problem with it. If you’re paying more than $3000 you’re either getting really ripped off, or you’re doing something really complex, and the main reason for complexity is avoidance.

    There was a comment about death and divorce. Reasonable point. Perhaps a single high-fee year due to such an event should be able to be amortised for example over 5 years. Then it helps these people out, but amortising is still useless if your tax affairs bill is $10,000 every year.

    • Most people would pay between $1,500 and $3,000 for an SMSF return and audit depending on the complexity, number of pensions etc.

      A client operating a business via a service trust, with a trustee company, who would likely have another two family trusts and a bucket company could be paying anywhere from $3,000 to $10,000 pa for the advice they receive. For many this is worth it.

      • Philly SlimMEMBER

        “A client operating a business via a service trust, with a trustee company, who would likely have another two family trusts and a bucket company”

        In no other country in the world would anyone set up a structure like this. Australia wins the gold for complexity in structuring. We need to disincentives trusts. What is wrong with a Pty Ltd structure??

        Trusts should be restricted to passive income only. Active income, and operating a business, should only be done through a company. One of the owners of the company could be a passive income trust.

  6. Does this cap include the cost of preparing financial statements. Filling out a tax return is the easy bit, its the actual preparation of the financials that can be time consuming. Factors range from Software issues, number of transactions/turnover, depreciation calculations, domestic v foreign income etc etc. Also the quality of the data provided to the accountant and the willingness of the client to respond to queries are just some of the many factors that go into working out an accounting bill.

    The idea while good in its intention, just lacks any commonsense.

  7. I seriously don’t understand how this works or benefits a high earner.
    Say I earn $1.1million and claim the average deduction of $1.065 million leaving me with a nominal $35K in earnings for the year.
    If I really paid over $1 million for my taxation affairs then I actually no longer have that money.
    If I didn’t pay it then it is out and out fraud and ought to be treated as such. It shouldn’t be too hard for the ATO to give the once over to these 48 people a year.
    It is the reducing of taxable income to zero via exorbitant tax agent fees I fail to understand. I cannot see how reducing income to zero is beneficial as you no longer have the money yourself.
    Is it to set up offshore secret accounts where money is hidden? If so, these massive deductions would be a great annual cue for the ATO as to who ought to have an audit.

  8. Does the ATO look at the large claims & check them out? If someone has reduced their Gross Income by claiming deductions to get their Taxable Income below a tax threshold it would be pretty easy to do an audit & check the bona fides of the deductions. Would have thought that was the no brainer. Me thinks some of this supposed AI analysis is a bit light on.