Coalition, accountants wage war against Labor’s $3,000 tax advice 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. Labor’s policy is estimated to raise $1.8 billion over a decade.

Prime Minister Scott Morrison has written to peak accounting bodies expressing concern that the policy would affect people who are restructuring their finances due to a change in their personal circumstances. Morrison also says the proposed cap may deter people from obtaining appropriate tax advice, a view shared by Institute of Public Accountants CEO Andrew Conway. From The Australian:

One in every 100 taxpayers will be caught by the Labor shake-up, which is estimated to raise $1.8bn over the decade…

“Discouraging Australians from getting the financial advice they need and then depriving them of their rightful income is a double burden that cannot be justified,” the Prime Minister said.

“There are good reasons why many individuals and businesses require extensive tax advice, such as during a divorce or following the death of a family member.

“Imposing a cap may lead to taxpayers limiting the advice they seek and making the wrong ­decision”…

The Institute of Public Accountants has decided to pass on the letter to its 15,000-strong membership, which includes 5000 practising accountants. IPA chief executive Andrew Conway said the overhaul represented an ­attack on “millions of hardworking taxpayers who are doing the right thing”.

He likened it to a revenue grab and warned the $3000 cap would deter taxpayers from getting appropriate tax advice.

In May last year, 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…

In other words, Labor’s policy is a no-brainer.

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