Australia Institute supports cap on tax advice deductions

Labor’s $3000 limit on accounting deductions will only hit millionaires.

Calls to cap tax advice deductions

Bill Shorten’s Budget reply speech earlier this month outlined a plan to limit the tax deductions available for the cost of managing tax affairs to $3000. New analysis of tax data shows this change would affect very few Australians.

Shorten said that one of the biggest deductions (on average around $1 million) claimed by millionaires who paid no tax was to their accountants.

“These individuals are not just counting cards in the casino – they are bringing their own dealer and their own deck. Loopholes for millionaires, means middle Australia pays more,” he said.

“That’s why a Labor Government will cap the amount individuals can deduct for the management of their tax affairs at $3000.”

The Australia Institute has researched the data and found that the change would have no impact on most Australians.

The majority of Australians make no claim for managing their tax affairs, and even among those in the top three per cent of income earners, most claims do not exceed the $3000 mark.

However, the policy does stand to net gains for the government due to the size of the claims of aggressive tax minimisers, some of whom claim over $1 million in deductions for tax advice annually.

Those on over $1 million dollar incomes deduct an average of $12,657 for the management of their tax affairs.

“A $3000 dollar cap will go unnoticed by the vast majority of Australian taxpayers,” senior economist at The Australia Institute, Matt Grudnoff said.

“One of the most remarkable figures we uncovered was the average deduction for those who earn over $1 million dollars and don’t pay any income tax. They spent, on average, over $1 million dollars on tax advice in a year.

“This loophole is legal, but when it’s being exploited in such an excessive way it probably doesn’t pass the pub test for most taxpayers,” Grudnoff said.

One of the interesting findings from The Australia Institute’s research is that nine out of the top 10 electorates with the highest cost for managing their tax affairs are Liberal strongholds, with the ALP-held Melbourne Ports the only exception.

Read The Australia Institute report.

Opinion: Closing obvious tax-dodging loophole a no-brainer

Government attempts to make Australia’s highest income earners pay their fair share of tax are always a bit like a game of whack-a-mole. As soon as one loophole is closed, accountants are able to find another one that has opened up and the chase seems to go on forever.

However, Labor’s latest policy does seem like a very sensible way of addressing the issue, taking away one of the easiest ways hide money from the ATO, while having zero impact on middle and low-income households.

Any time tax figures highlight the incredibly low tax paid by the country’s highest earners, Australians are rightly furious, especially when the Government is giving big business a $65 million tax cut.

The change seems logical. Not only will it force the very highest income earners to pay more of the tax that they owe, it will raise $1.8 billion over the next decade according to Shadow Treasurer Chris Bowen.

Unfortunately, the Liberal Party doesn’t seem to have much interest in this proposal, and once you look at the electorate breakdown of those most affected it is easy to see why. Prime Minister Malcolm Turnbull’s Wentworth electorate has the second-highest average cost of managing tax affairs in the country, behind Assistant Treasurer Kelly O’Dwyer’s seat in Higgins.

What do you think? Should there be a cap on the deductions available for managing your tax affairs? Do you employ a tax agent or do your taxes yourself?

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    COMMENTS

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    Ted Wards
    24th May 2017
    10:20am
    Its not rocket science, someone earns a million dollars a year and claims that every cent of the money goes on tax advice and they don't actually pay tax. Indeed cap it and make no exceptions, including the ministers and their staff themselves. They should be subject to the same rules as everyone else.
    MICK
    24th May 2017
    10:25am
    I don't use accountants myself but do understand that returns which are complex need more work than that of a wage earner.
    There are better things to target than this and perhaps the many deductions, for want of another word, and the accounting fiddles and offshore tax shelters need to be the ones targeted. That is I suggest where the real actiom is in tax avoidance and the area this government does not want to go. I wonder why.
    Placido
    24th May 2017
    10:33am
    Mick,
    I used a tax accountant when I was working because of allowances etc, never got near a $3000 bill, why should a person earning very income use tax management deductions to reduce his taxable income to nil or very low, this also reduces their exposure to the medicare levy (medicare levy should be on gross tax for individuals earning in excess of $200,000 to pluck a figure out of the air they would not be able to avoid it then)
    GeorgeM
    24th May 2017
    9:45pm
    Liberals are simply true to form by not touching the rich tax avoiders using tax loopholes.

    However, Labor (Shorten / Bowen) are also pathetic when they pick up only one method used for evading reasonable tax and suggesting a fix (because the media reported factual ATO information), and ignoring the rest of the loopholes. After 6 years of inaction in Govt, they are still ignoring their own internal members who have been recommending a Buffet-rule type of tax as an alternative solution - whether 35% or whatever on Gross Income without allowing any deductions as a "Minimum Tax".

    So the question remains - who can the people vote for to get fair rules?
    MARK
    24th May 2017
    10:26am
    IF THE SINISTER MILLIONAIRES ARE NOT PAYING ANY TAX, HOW DOES A TAX DEDUCTION HELP THEM OR HOW DOES DENYING A DEDUCTION HINDER THEM??
    THOSE PROVIDING TAX ADVICE ARE ALSO PROVIDING BUSINESS STRUCTURING ADVICE, FINANCIAL ADVICE ETC ETC....THIS IS TYPICAL POLITICS OF ENVY WHICH WILL ACHIEVE FAR FAR LESS THAN STATED
    Placido
    24th May 2017
    10:35am
    Mark they are NOT payong tax because the DEDUCTIONS bring their taxable income down to the threshhold
    MICK
    24th May 2017
    11:26am
    Very touchy there Mark.
    You are muddying the water mate as there are all shades of grey here. The important issue is that the top end continues to refuse to release the PERCENTAGE of tax it pays and this is the figure that matters. The ATO has information so no problem releasing it.....say the % of tax paid by income earners earning over $400,000 pa.
    Your call about 'envy' is the normal red herring which often comes from the top as it seeks to hide its indiscretions. I seem to recall that our PM has managed to hide his financial dealings now from scrutiny recently. Why might that be?
    KSS
    24th May 2017
    12:24pm
    " I seem to recall that our PM has managed to hide his financial dealings now from scrutiny recently. Why might that be?"

    Ummm.... Perhaps because it is none of your business! He is breaking no laws.
    Eddy
    24th May 2017
    12:53pm
    KSS, of course he breaks no laws, when you are in a position to ensure the laws do not adversely affect oneself you can ensure any laws which may adversely affect yourself do no get into the statute books. The current tax laws were bought in by previous governments to the advantage of high wealth corporations and individuals and the current government shows no inclination to change them.
    Nevertheless the way one manages ones personal affairs (particularly financial affairs) reflects on ones integrity. For instance if they are using overseas tax shelters to avoid Australian tax would be a pertinent question of those holding political power.
    MICK
    24th May 2017
    7:51pm
    And perhaps he does not want people to know that the leader of the country has his fortune stowed in offshore tax havens. God forbid that the public might see (legal) tax avoidance from any from the big end of town. Not to be tolerated!
    MARK
    24th May 2017
    10:28am
    High net worth individuals are required to complete a much longer and more detailed tax return form than others. It is a different form and amounts to discrimination. This proposal increases that discrimination.
    4b2
    24th May 2017
    10:50am
    No so Mark. Tax returns for individuals do not vary that much. High income earners may how ever have other income streams from investments and other business interests. Then the treturns match their activities and charges apply by their tax agents. And so they shoud.
    MICK
    24th May 2017
    11:28am
    I do not oppose reasonable costs for managing affairs but draw the line where highly paid lawyers and accountants are employed to devise schemes to legally defraud the tax system. Those costs should never be allowed as deductions.
    KSS
    24th May 2017
    12:29pm
    Mick, If the action is legal then it is NOT defrauding anything or anyone. Tax minimisation is perfectly legal and I would suggest a very large number of taxpayers do that every year (right down to the person claiming the $300 a year 'business expenses' which don't have to be receipted).

    Legally defraud????? Simply not possible. Its either legal or it isn't.
    Trees
    24th May 2017
    1:19pm
    I don't know how it increases discrimination, wouldn't a change is the deduction threshold just be closing as the above article says, a legal loophole that's being exploited?
    Tom Tank
    24th May 2017
    1:50pm
    I think you are missing the point KSS in that it is the laws drawn up to favour the wealthy that are discriminatory and as such unfair.
    A complication in all this was Sir Garfield Barwick, a former Liberal politician, when Chief Justice of the High Court set a precedence by insisting that a law must be interpreted by its wording and not by its intent.
    This opened the door to the wealthy employing highly paid lawyers and accountants to minutely examine laws for loopholes that would favour their tax deductions.
    It was reported recently that a number of people on gross incomes exceeding 2 million per year were using a deductions for tax return preparation of 1 million to minimise tax. Their other deductions eliminated their tax bill entirely. This is, by current laws, quite legal but is it fair and is it morally ethical?
    MICK
    24th May 2017
    7:55pm
    KSS: who do you think makes the laws for the top to rort the system? And why are loopholes NOT closed as soon as they appear?

    The whole point about fraud, legal or otherwise, is that it should not be permitted. Your post suggests that you may be a player in this game and it so you are a disgrace to this country which was founded on fairness rather than how much you can avoid by invoking schemes of arrangement which are fraudulent in their very nature. Forget about 'legal'. The law is an ass. Talk about the difference between right and wrong.
    KSS
    25th May 2017
    7:19am
    How dare you Mick. If anyone is the disgrace it is you with your rude and abusive comments to me and others. I have repeatedly said I am not wealthy by any means. I earn well under the national average and what I have I have worked damn hard for.

    I just don't have the jealousy gene that you seem to have multiple copies of. Pull your head in!
    Placido
    25th May 2017
    11:04am
    To KSS, obviously we need to change the law make it illegal then it would become FRAUD if indulged in.

    It is not reasonable for some individuals to pay very large amounts for advice on how to avoid paying their share of tax in this country where they derive all of their benefits and then be able to claim very large deductions (CAP the deduction limit for tax advice for INDIVIDUALS by all means) , it has not been uncommon for high net worth individual to so structure their taxable incomes that they are "eligible" for welfare payments meant for people who need it. (In my mind legal or not that is FRAUD and unethical)
    Drewbie
    24th May 2017
    10:29am
    It certainly is a no-brainer that this loophole should & must be permanently closed for the rich & ludicrously wealthy. It doesn't make any " pub sense " at all that a 1 million + income earner would willingly pay a million bucks on " Tax Advice " just to pay no tax whatsoever on their income. Any rich person who has a " moral compass " would see/recognise/acknowledge the " value " of paying their fair share of the overall tax burden Australians pay. Because rich, wealthy people drive on roads, use public transport - when it suits them, use our public hospitals - when they have no alternative, expect to be kept safe by our law enforcement personnel . . . . the list is endless.

    Folks; it is the taxes " WE PAY " that enable us to enjoy what we consider as " essential services provision " by Federal & State Governments. Not a single individual of the 1 to 5 % of Australia's wealthiest population has any right to " bot fly or sponge " off all non-wealthy taxpayers who often work much harder & longer hrs just to earn an honest living, & pay their fair share of tax.
    Old Geezer
    24th May 2017
    11:27am
    I'm sure those in the pub would like to pay less tax too if only they knew how.
    MICK
    24th May 2017
    11:29am
    You are correct Geezer but the issue is that the rich can manipulate the system whilst average earners cannot. If they could the loopholes would be closed tomorrow.
    Eddy
    24th May 2017
    12:57pm
    Raises the question, is GST payable on 'tax advice'? If so a $1M tax advice bill would recoup $100k in GST.
    Trees
    24th May 2017
    1:22pm
    GST deduction would only apply if you registered with the ATO for GST.

    GST for individuals is just another tax.

    From what I understand in this article, it is targeting individuals not companies.
    Placido
    24th May 2017
    10:29am
    What an extremely sound and fair way of managing the excessive tax deductions of those that do not seem to pay their way. This may cause a downturn in some accounting firms profits but that is in a good cause. We may also see a rush of newly formed companies as the lemmings scamble to retain the perks.
    MARK
    24th May 2017
    10:45am
    Placido, I thought it was loopholes that were being attacked, not deductions; because a deduction to one person is INCOME to the recipient accountant!
    Placido
    24th May 2017
    10:52am
    If the cost of using loopholes becomes less attractive (reduced deductions for advice) then there would be less use of the loopholes. I guess the accountant losing that income could offset it by claiming advice deductions through the services of another accountant (individuals would have tax management deduction caps applied in this proposal not businesses) excessive deductions for tax "management" is in itself a LOOPHOLE.
    Old Geezer
    24th May 2017
    11:12am
    Nay it's easy than that.

    The accountant is a company registered overseas possibly belonging to person claiming the tax deduction and they pay little if any income in Australia.
    MICK
    24th May 2017
    11:30am
    Probably need both Mark. The ATO needs to have powers to determine what is fair and what is not.
    Old Geezer
    24th May 2017
    11:15am
    Earn $5 million give $3 million to a charity run by your wife, rest to your accountant which you own and is registered in the Cayman Islands and you pay no tax but get the benefits of the whole $5 million.

    24th May 2017
    11:21am
    This article, and some of the comments, suggest that the very rich pay no tax and this is not the case. Some of the very rich are very good at what they do to earn their money but are not trained in the complex tax laws of Australia so they turn to those who are expert in that area. Just as wage earners claim the donations, union fees etc, the very rich are claiming their legitimate deductions which includes paying for someone to assist completion of the tax return. This suggestion by Shorten is just the "tall poppy" syndrome and the usual Labor politics of envy.

    Labor has moaned about people who are using offshore tax havens and multinationals which are avoiding tax with clever accounting but they haven't formulated a plan to stop these rorts. They are aiming for low hanging fruit but they forget that these are the companies which employ people who, in turn, pay their taxes.
    MICK
    24th May 2017
    11:37am
    The issue here is if the rich are paying a fair PERCENTAGE of their income in tax or not. Under 10% is not acceptable if they are on the top marginal rate. Nor is the ability for massage the figures and claim dubious deductions which you or I would have denied if we included them in our returns.
    You are correct about both sides not changing the laws. Offshore tax shelters are not going to be touched. Why? And then we have the whole minimisation industry which is rife with tax avoidance. Thinking of putting my dog and cat in a Trust so that I can income split and then claiming some other deductions for each of them as well. That'll work if Mr Fugia the accountant puts in the return for me.......
    Tom Tank
    24th May 2017
    3:23pm
    There are also Family Trusts which are used to minimise tax but it is almost impossible to find out details on those.
    It appears a large number of LNP politicians have family trusts as do some ALP ones.
    Why are so many politicians so involved with tax minimisation? It certainly indicates that it is hopeless to expect Parliament to legislate fair and equitable tax laws when those who will make the decisions are up to their necks in reducing the amount of tax they themselves pay.
    We really need a Royal Commission into the taxation system in this country. Don't hold your breath tho'.
    Anonymous
    24th May 2017
    4:20pm
    Thank you MICK, your figures are intriguing. Are you saying that the rich are paying under 10% or is that the figure that you find unacceptable? The deductions you and I would find unacceptable is irrelevant because we aren't making the judgement on what is acceptable and what is not. Australian tax law as defined by the ATO makes those decisions and I'll run with that.
    MICK
    24th May 2017
    8:20pm
    A ball park figure only Old Man.
    Many rich pay no tax at all on their companies and whilst the ATO may want them to they are able to refuse. Even the ATO does not have the resources to spend the next 8 years in the courts whilst the big earners have an unlimited supply of money to pay its legal teams We'll have to agree to disagree about the tax laws as we may with the current tax cuts for the rich. Both were pushed through by the rich man's Party for the benefit of its rich election funding contributors.
    niemakawa
    24th May 2017
    8:25pm
    @MICK, why not cut the maximum earnings of any individual to $100,000. Exceed and then slap on a punitive tax rate of 95%. Maybe that would be more to your liking.
    Not a Bludger
    24th May 2017
    12:00pm
    OMG - here we go again -if someone is smart enough to earn a quid - quick, take it off them and give it to someone who isn't (or a so-called public servant).

    Those with complex affairs can easily have accounting/tax/legal costs of more than $3000 pa. simply because of complexity of red tape and regulation in Australia - look at the size of the Tax Acts & regulations.

    Leftie, rent seeking economists at the likes of AI have no idea or experience of the complexity of the real world of commerce and business and the interface to personal income.
    Trees
    24th May 2017
    12:25pm
    So are you advocating that there be no threshold for deductions to manage your tax affairs?
    Old Geezer
    24th May 2017
    12:38pm
    Cool so one can keep their accounting company in the Caymans so they pay no tax.
    Not a Bludger
    24th May 2017
    1:42pm
    Why should there be a threshold to any legitimate business expense - and how one arranges one's business affairs is one's personal choice - just ask, say, Twiggy Forrest, Graham Richardson, Gina Rinehart, Bill Shorten,Malcolm Turnbull, Lindsay Fox, many military, police diplomats, politicians, tradies to name but a few.
    Trees
    24th May 2017
    2:38pm
    Not a Bludger - this proposed threshold is for individuals not companies.
    Not a Bludger
    24th May 2017
    2:55pm
    Trees - I know that, which is why I referred above to the interface between company taxes, dividends and personal income - viz., imputation credits which when credited can mean reduced or no personal income tax - because significant tax has already been paid prior to distribution on the earnings.
    Trees
    24th May 2017
    4:09pm
    Thanks for clarifying what you meant.

    Understand now that you were pointing out the the individual/company relationships,so this threshold won't affect them, correct?

    Miliary, police, tradies etc. will be restricted by the threshold, why is that a bad thing?
    Not a Bludger
    24th May 2017
    5:28pm
    In part, Trees - but it is the same wether one is Gina Reinhrart or a tradie.
    If one takes one's earnings from dividends, paid from after tax profits, imputation credits for the tax paid are in the hands of the dividend recipient.

    The purpose is to ensure that tax is paid only once not twice.
    MICK
    24th May 2017
    8:24pm
    I have no issues with any taxpayers with complex affairs to be able to deduct $3000 from their taxable income. But bear in mind that even the small fry will then be deducting this amount.
    I dare say the real cost of managing affairs and paying people to dream up tax schemes for the big boys might be far greater and have at last one zero at the end of $3000, and maybe more.
    KSS
    24th May 2017
    12:39pm
    I agree this is envy politics AGAIN! If there are so few who would be affected why waste the energy and resources on this. Why not go after those millions of 'middle class' families who actually pay NO NET TAX because they get more back in welfare payments than they actually pay in income tax.

    Mr Shorten wouldn't do that though because it would be political suicide to go against the popularist point scoring so beloved by the Greens and Labor.
    Trees
    24th May 2017
    1:44pm
    I don't believe its a waste of time or energy if it is closing a legal loophole that is being taken advantage of by very wealthy individuals. 1.8 billion over 10 years is a significant amount.
    I would have thought that the majority of people would be happy that a threshold is put in place?
    Welfare payments well that is a whole other can of worms.
    MICK
    24th May 2017
    8:27pm
    I would not even question such a low threshhold. Don't know why posters are even getting worked up about it.
    Trust you KSS to come back to the predictable right wing line. Always play the man and rarely the ball again eh? Maybe discuss the corruption at the top occasionally rather than the crumbs at the bottom. You always want to fix one end and ignore the other. Why?
    KSS
    25th May 2017
    7:21am
    Mick you are a master athlete at 'playing the man'. Pot, kettle black!
    floss
    24th May 2017
    1:08pm
    This has really hit a nerve with the greed is good mob.They really squeal like the pigs they are.
    Farside
    24th May 2017
    1:29pm
    While $3000 is probably enough for most regular taxpayers it may not suffice for those with complex affairs or those having to catch up after making their affairs complex through neglect. Regardless, the idea of capping an expense incurred in the course of your activities is bad policy and efforts to constrain the excesses and abuses of the wealthy are best directed toward other areas.
    Old Geezer
    24th May 2017
    2:24pm
    $3000 may not be enough but should they be allowed to deduct millions off their tax for managing their tax affairs?
    Farside
    24th May 2017
    5:15pm
    In principle preparation of tax returns is still an expense, so question is whether some income earning related expenses should be deductible while others partially or not at all. If you agree with a principle then it should be allowed as a deduction without capping.
    Farside
    24th May 2017
    5:20pm
    Perhaps a distinction needs to be taken between tax preparation and tax planning, with the latter being a non-deductible expense. There is some academic rigour to this thought as tax planning could be argued to be capital in nature rather than an operating expense.
    niemakawa
    24th May 2017
    3:16pm
    I maybe wrong but from personal experiences when on the odd occasion I have used a tax agent the fees by the tax agent could only be claimed as a tax deduction in the following tax year and cannot be carried forward beyond that.

    Having said that why not close all loopholes and not allow any deductions whatsoever for businesses and individuals. No tax credits either. Instead lower the income tax rate , preferably a flat one, to say 5-10%. No exemptions.
    Old Geezer
    24th May 2017
    3:47pm
    There would be hardly a business that would survive with no deductions. Some only have margins of 2 or 3% on turnover so they wouldn't even be able to pay your flat tax.
    niemakawa
    24th May 2017
    3:50pm
    @OG I agree. I was making a point about the futility of some comments posted here. Many want to cherry pick but leave theirs on the tree. Business drives the economy and everyone benefits, even the so-called "poor".
    MICK
    24th May 2017
    8:32pm
    Fair deductions are fine, normally related to the business a person is in. But then we get the plethora of instruments to lower table income: income splitting (the family dog included?), superannuation contributions (the maximum allowable), loopholes invented by accountants and lawyers, family trusts and now offshore tax shelters.

    Let's talk about what is fair and just not how to scam/game the system.
    niemakawa
    24th May 2017
    8:43pm
    @MICK, All operating with the law. Would you like to see exchange control re-introduced to stop the free flow of funds, contributions to super. capped at the legislated SGC level, no spouse rebates, no child benefits, no free of tax threshold,, medicare paid by everyone, and the list goes on. Surely that is fair. The top and bottom must make a contribution. Too many at the bottom end not paying enough, but taking all the benefits.
    TREBOR
    24th May 2017
    9:51pm
    How will Malcolm fare under that kind of deal? How will those corporations that employ bevies of beavering bandit accountants to find every loophole for them go?

    At least the pressure about tax avoidance is beginning to tell on Labor as well - they've done nothing but aid and abet it for years for their own benefit.
    Adrianus
    27th May 2017
    7:24am
    Agree ROBERT, following many years of empire building in the law and accounting sector, we now have a politician who wants to put them out of business.
    I'm really disappointed in Bill Shorten. He has no plan apart from his them and us strategy to develop some envy and hatred. I say, you live by the sword you die by the sword Billy. As a political strategy it is very shallow and to prolong this hatred /envy, them and us game will eventually go into reverse gear. His party will dump him when they realise he is unelectable.