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Caps on specific deductions, such as the deduction for the cost of managing tax affairs, are “selective and distortionary”, the government has been told.
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Steer clear of managing tax affairs cap, government told
28 October 2019
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In its 2020–21 pre-budget submission, the Tax Institute said it would not endorse caps on specific deductions, using the contentious cost of managing tax affairs deduction as an example of where such a cap would be unfair.
“While the Tax Institute would support investigating whether the standard deduction could apply in lieu of the variety of work-related expenses claims, the Tax Institute does not generally endorse caps on specific deductions, such as the deduction for the cost of managing tax affairs,” the Tax Institute said.
“Such caps are selective and distortionary. There would need to be good policy reasons for imposing a cap selectively on a particular deduction.”
The deductibility of the cost of managing tax affairs was a controversial topic in the build-up to the May election, with former Labor leader Bill Shorten labelling it a “rort”, arguing that imposing a $3,000 cap on the deduction would raise $1.8 billion over a decade.
The policy was widely lambasted by the profession, with many noting how the deduction would affect those appealing to the Administrative Appeals Tribunal or courts in relation to tax affairs, or those seeking tax advice for complicated one-off life events such as dealing with a deceased estate or divorce.
Simplify the tax system
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The Tax Institute also repeated calls to simplify the tax system, calling for the government to consider repealing 115 taxes that only contribute to 10 per cent of the revenue take, compared to the 10 taxes that contribute 90 per cent to revenue.
It believes a loss of revenue should be weighed up against the compliance burden associated with maintaining these taxes.
“A contentious matter would be, for example, repealing fringe benefits tax — where there would be a trade-off between the loss of the small amount of revenue and the large compliance saving to taxpayers and the administrator, the ATO, by removing this tax,” the Tax Institute said.
“The revenue collected is prima facie unlikely to justify the compliance burden associated with maintaining these taxes. Repeal of these taxes would have the additional benefit of simplifying the Australian tax system.”
The submission also highlighted the need for Australia to keep up with counterparts in the Organisation for Economic Co-operation and Development (OECD) whose tax systems rely more heavily on broad-based consumption taxes.
With only 13 per cent of revenue in Australia comes from GST compared with the OECD average of 20 per cent, the Tax Institute believes broadening the GST base will allow for a reduction in other tax bases, including a heavy reliance on personal and corporate taxes.
Tax Institute senior adviser Bruce Quigley said that while the professional association would continue to lobby for a sound tax system, it was unlikely for holistic reform to be undertaken in the current political climate.
“It remains to be seen whether the government has the political courage to adopt the recommendations in the submission,” Mr Quigley said.
“Experience tells us that fundamental and holistic tax reform is unlikely.”
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