Recent ATO data shows, 8.6 million Australians claimed work-related expense deductions to an aggregate value of $22 billion on their tax returns, resulting in a reduction in the ATO’s tax take of between $7billion and $10 billion.
The average expenses claim was for $2,500, which presumably had not been reimbursed by their employer. Importantly, half of the workers who claimed had expenses of around $1,000 or less, meaning the average claim across the remaining 4.3million claimants was significantly higher than the overall $2,500 average.
Would the conduct of some of these individual taxpayers pass the “pub test” that Australians so often like to apply to political and corporate behaviour?
Australia has retained a largely “principles-based” approach to the tax deductibility of work-related expenses (WRE) for many years. In order to be deductible, an expense needs to pass the test that it was “incurred in gaining or producing assessable income”. This concept allows plenty of scope for interpretation, and, some experienced observers might say, imagination, from the 8.6million taxpayers who are making work related claims.
Parliament has legislated very few restrictions on the basic concept. Those it has implemented include denying deductions for entertainment expenses and bribes to public officials.
So it falls to the ATO to verify individual taxpayers are being reasonable with their claims.
The ATO regularly issues guidance and educational opportunities to taxpayers, seeking to reduce the risk of people making excessive claims. However, no matter how much the ATO deploys the latest data analytics technology, the considerable time it would spend on collecting the additional tax from these work related claims it adjusts is unlikely to represent an optimal allocation of its resources.
So what are the Federal Government’s options?
An individual annual cap on work related expenses.
At a stroke this would reduce the amount of any revenue loss that could arise from inappropriate claims. The benefit of this approach, from a revenue perspective, is there would be no “give away” to taxpayers, and only those with larger claims need be impacted. However record keeping and ATO review activity would need to remain.
A “phase out” of work related expenses depending on the taxpayer’s gross income.
ATO statistics from recent years indicate higher income earners claim the highest dollar value of expenses per individual. The US, for example, scales back allowable expenses once a certain income level is reached, and the highest income earners may only be able to deduct as little as 20 percent of their total work expenses. This approach would only impact those taxpayers who the community may consider should pay a certain share of the tax burden, regardless of their expenses. However, it could lead to a very high effective rate of tax on those individuals.
A universal standard deduction.
Implementing a universal “standard deduction” for all employees, with no justification of expenses incurred, in return for eliminating all other deductions for work related expenses. Based on the 2015 ATO data, it appears a standard deduction could possibly exceed $1,000 per worker, while still costing less (in both revenue and ATO resourcing) than the current model.
This approach, once legislated, would be the most straightforward for all concerned. It would also facilitate the elimination of tax returns, as we currently know them, for taxpayers with relatively simple affairs. However the possible consequence of workers who have hitherto been employees increasingly seeking to characterise themselves as being in-business (eg as contractors) would need to be addressed.
Australia’s current principles-based approach would arguably be the fairest, if it were possible to guarantee the reasonable and consistent application of those principles. However this is simply not feasible in a resource-constrained environment. Therefore it is timely to look at other approaches which can provide a common sense outcome in the great majority of cases.