Tax agents wage war against Labor’s $3,000 deductions cap

By Leith van Onselen

In his Budget reply speech last year, 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.

On Monday, The Tax Institute labelled the policy “outrageous” and claimed that it would “cause fee pressure and see clients limit their advice to a dollar amount”. From Accountant’s Daily:

Accountants Daily understands that there will be a carve-out for individual small businesses with an annual turnover of up to $2 million.

Individuals, and other business-like structures such as trusts and partnerships that are taxed as individuals, will be affected by the measure…

The Tax Institute’s senior tax counsel Professor Robert Deutsch has labelled the proposal as “outrageous”.

“This proposal is outrageous and as a matter of equity should not proceed. People are entitled to spend whatever is needed in managing their tax affairs,” said Professor Deutsch…

“It will have implications for the tax advisory industry because it will mean that those who are around the $3,500 to $4,000 mark- there will be a heap of pressure on the adviser to bring it down to $3,000 so it will change behaviour and there’s no question about that.”

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…

Therefore, Labor’s policy appears to be a policy no-brainer.

[email protected]

Comments are hidden for Membership Subscribers only.