The $22 billion cost of work-related tax deductions to be tackled in federal budget


The Turnbull government wants to take a stab at reducing an estimated $22 billion in tax deductions for work-related expenses each year, and may consider introducing a standard deduction for all taxpayers or doing away with certain deductions in favour of lower tax rates.

A government inquiry pushed by Treasurer Scott Morrison has been examining whether a host of work-related tax deductions claimed by individuals every year could be scrapped or reduced, and instead replaced with low personal tax rates.

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It’s all about changing the tax mix, according to Peter Martin.

Mr Morrison last year asked his department to look into a universal cap on income tax deductions that would apply to work-related expenses, as well as housing tax breaks including negative gearing and the capital gains tax concession, which he later ruled out any changes to.

But it is believed there is still appetite for changes as soon as the May budget in relation to work deductions, which the tax man says are being over-claimed by millions of Australians. 

A number of submissions to the federal inquiry into tax deductibility have recommended that close to $22 billion in work-related deductions that were claimed in the 2015 financial year should be tackled.

The inquiry is also examining tax breaks for housing mainly benefiting the wealthy including negative gearing and capital gains tax concessions.

Pressure from business lobbies including the Australian Institute of Company Directors and the Australian Bankers Association led by former state premier Anna Bligh has mounted in recent weeks.

Non-compliance rife 

David Coleman, chairman of the House of Representatives standing committee on economics which is holding the inquiry, has said that when it came to work-related tax deductions, “with such large amounts involved, it is critical that the system is well administered”.

In its recent submission to the inquiry, the ATO noted it was “concerned about the level of non‐compliance in relation to work‐related expenses”.  

The agency said that there was an entitlement culture among Australians, especially “similar socio-economic groups” where groupthink had caused an attitude of “everyone else gets money back – I should too”.

The Tax Institute’s senior tax counsel Professor Bob Deutsch said one option likely to be under consideration is allowing a standard deduction for work-related expenses.

He said a standard $500 deduction, floated previously, was unlikely to be sufficient for a vast array of taxpayers who currently claim at least double that amount. “This amount is presumably to include the costs of managing one’s tax affairs,” he said.

In Australia, 75 per cent of taxpayers with work-related expense claims lodge through a tax agent.

A $1000 deduction?

Professor Deutsch said to be effective the deduction amount should be at least $1000. A standard deduction was preferable to tightening existing requirements around work deductions, which is “only likely to add to the prevailing confusion”.

The ATO said 8.6 million taxpayers claimed a total of $21.8 billion in work-related expenses in their 2015 tax returns, accounting for about 60 per cent of total deductions.

Of these, 7.5 million (87 per cent) were taxpayers who are not in business, claiming $18.8 billion.

“Claims have increased by 21 per cent over the past five years compared to salary and wage growth of 21.8 per cent and CPI growth of 12.2 per cent,” the ATO said in its submission.

Car ($9 billion, 3.4 million taxpayers) and other expenses ($7.8 billion, 7 million taxpayers) account for 77 per cent of the total amount claimed.

For those who claim work-related expenses, $2000 is the average amount for self-preparers, and $2600 is the average for those who lodge through an agent.

Aussies love claiming uniforms

Uniform/clothing/cleaning is one of the most commonly claimed deductions. Another government-led hunt for cash is looking at non-compulsory work uniforms specifically.

The ATO said that while amounts over-claimed by individuals on all types of work-expenses are relatively small, they add up across the large population of individual taxpayers. 

In 2015-16, the ATO undertook over 100,000 compliance activities – including a mix of tailored letters, pre-issue reviews, audits, and personal visits to tax agents – resulting in $93 million in revenue.

But there were “third-party influencers who may promote a claiming culture, or perpetuate the myth that over-claiming is a low-risk activity”, the ATO said.

So effectiveness of compliance strategies was challenged, the ATO said, since “almost any item purchased may be deductible in the right circumstances” and there was an “absence of third-party data to validate work-related expense claims”.

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