Some tax deductions for the cost of managing tax affairs exceed $1 million, but high wealth individual\s can write off the expense in other ways.
For some people tax time will result in no tax paid this year, and if past years are anything to go by, will be millionaires.
Not mere millionaires, but millionaires earning more than A$1 million per year.
For some of these 50 or so very high earners, managing tax will be expensive. The two dozen or so that typically claim deductions for the 鈥渃ost of managing tax affairs鈥 claim an average of about .
It might have been with this in mind that during last year鈥檚 election campaign Labor promised to cap the size of the deduction people could claim for 鈥渕anaging tax affairs鈥. The proposed cap was $3,000.
Tax agents would still be able to charge more than $3,000 鈥 a lot more if they want to, even an additional million or more 鈥 but their clients would only be able to deduct $3,000 of it from their income when submitting their tax return.
The rationale was straightforward: if people are claiming over $1 million in deductions on money spent managing their taxes, then putting a ceiling on those deductions ought to stop it.
Labor leader Bill Shorten wanted to cap the deduction for the cost of managing tax affairs at $3,000. DAVID CROSLING/AAP
Not so fast.
Often in tax we plug holes quickly rather than stepping back and looking at the whole system and its interactions. And then we have to plug another one.
The question to ask first is whether capping this individual line item would prevent or move the leakage.
We went to the source by conducting a of Australia鈥檚 most senior tax professionals to glean their perspectives.
Our findings reflect the views of people who, to paraphrase , 鈥渨ould say that, wouldn鈥檛 they鈥.
Nonetheless, the detail of what they told us was surprising.
Here鈥檚 what they said.
Most of the targets would be unaffected. They would be able to switch their deductions into associated corporate entities. This interchangeability of personal and corporate tax deductions highlights the importance of considering the system as a whole.
Because of this it might, counter-intuitively, have the opposite effect to what was intended, creating a saturation where the truly wealthy could escape the cap, but those of lesser means could not.
A better solution would be for the tax office to conduct more tax audits. Studies suggest the decisions of high wealth individuals to engage in aggressive tax planning practices are influenced by the probability of being selected for audit.
There are definitional ambiguities in relation to the subcomponents of the deduction that make it hard to work out what is going on. Sometimes 鈥渓itigation鈥 includes tax planning, other times it does not. 鈥淥ther鈥 is a grab bag that can include . It would help if the tax office provided guidance.
High wealth individuals often employ tax advisers to cope with complexity and uncertainty of the tax system rather than to reduce tax.
As we said, you are welcome to consider the possibility that the observations of the tax professionals are self-serving, but their overwhelming embrace of more tax audits and their pleas for the tax law to be easier to understand also suggest a keenness to ensure that taxpayers do the right thing.
Labor鈥檚 proposal to cap the deduction for the cost of managing tax affairs at $3,000 (when for most people the deduction is ) was understandable, although it might not have worked as intended.
It was a reminder of the oft-quoted maxim that for every problem there is a solution that is simple, neat 鈥 and wrong.
For further details, please see: Kayis-Kumar A, Evans C and Lim Y, (2020) 35(2) Australian Tax Forum.
, Senior Lecturer and Tax Clinic Director, School of Taxation & Business Law, ; , Professor, School of Taxation 锛 Business Law, , and , Senior Lecturer, Accounting,
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