Australia’s tax system is complex, meaning the ability for a taxpayer to comply with their obligations can be a big challenge. Recognising the likelihood that most taxpayers will require professional assistance in complying with their tax obligations, Australia’s tax laws allow taxpayers the ability to claim a tax deduction for the costs of managing their tax affairs, with no cap on the costs incurred.
However, the Labor party perceives there is abuse in the system.
To overcome this, a key election policy of the Labor party is to restrict the amount an individual, trust or partnership can claim as a tax deduction for the costs of managing their tax affairs. This measure originated from reports showing a small number of ultra-high wealth individuals claiming hundreds of thousands of dollars in deductions each year, but is likely to impact a far broader range of taxpayers.
Under the proposed measure, there will be a blanket limit on the deduction for the cost of managing tax affairs of $3,000 for individuals. This will affect ultra-high wealth individuals, however, it’s also a measure which risks penalising low to middle income earners who are not looking at aggressive tax strategies, but merely dealing with the tax issues that come with certain life events.
Here are five common examples of when an ordinary Australian would require more than $3,000 for complex advice:
1. Relationship breakdown
Your spouse – regardless of your marriage status – can complicate your tax outcomes, particularly when separation occurs. On top of all the other complexities involved in a divorce or defacto split, property settlements between ex-spouses bring with them a range of difficult tax issues that can have a big impact on the fairness of the property settlement.
If the appropriate tax elections aren’t able to be made at the right time, an individual may find that even their main residence could be taxable in the future.
This measure risks further driving inequalities where one spouse has the ability to afford advice over another. The reality is that this would disproportionately affect women. Navigating the complexities of a relationship breakdown are imperative for all Australians, no matter what their income status.
2. The sick and elderly
With an ageing population, the frequency of life events occurring as a result of illness or age is becoming more commonplace. Obtaining proper tax advice is crucial at this time.
An example is the decision to move in with relatives (maybe in a “granny flat”) or to an aged care facility. Do you want to rent your main residence out to pay for this or should you sell your home? Should you pay for construction of the granny flat even if it is on someone else’s property? What will happen when you die? While it’s a great idea to be self-funding, the tax consequences that this can bring can be significant.
3. Have a family member die
When a family member dies there are a series of tax issues an ordinary Australian would be faced with and often these result in an out-of-pocket expense for the family. The family home, superannuation and life insurance are examples of some of the many things that need to be dealt with, and each of these can be significantly impacted on by tax and therefore require good advice. At a time of grieving, it places an unnecessary and unfair burden on an individual’s shoulders to increase the financial cost of the advice by making some of it non-deductible.
4. Moving overseas
Increasingly people are moving overseas, or to Australia, for work and family reasons. Many countries (lie Australia) have laws in place to ensure everyone pays their fair share of tax, no matter where they reside. Working out where you are subject to tax and how to ensure you don’t get taxed twice on the same thing is a complicated process and requires advisors who have in-depth specialist knowledge of cross-border tax laws. The specialist expertise also means a higher than usual cost of attending to that individual’s tax affairs.
5. Get questions from the ATO
Our tax system is based on “self-assessment”, which means that ATO audits and reviews are a necessary part of making sure the system works. Some audits and reviews are short and simple. Some are much longer and more involved even when there is no mischief on the taxpayer’s part. No one wants an ATO audit or review but when they come, getting proper tax advice is essential. An individual’s worst tax day is the day when they receive an ATO review and have not yet considered their issues. There is a short time frame to respond and there may be no protection from penalties. Whilst managing a worse-case scenario can be done with the right advice, it’s intense and expensive.
There are a multitude of life events which can impact on Australian’s, and the associated tax advice can be costly. Australians should not be deterred from seeking the appropriate advice for events which are already emotionally straining.
Australia’s politicians need to be aware of the flow-on effect of their policies.
If people don’t seek the right advice it raises the question – could a $3,000 limit see the rise of non-intentional non-compliance?
While this measure is aimed at a minority of taxpayers purportedly abusing the system, the Labor party may find that the very issue they seek to resolve is instead worsened.
The bulk of Australians pay their fair share of tax. By getting proper tax advice when unusual events occur, they can ensure that they continue to comply with their tax obligations.
Limiting the tax deduction for tax advice increases its real cost which in turn will make it too expensive for many ordinary Australians. This would increase the non-intentional non-compliance in the tax system – situations where a taxpayer is trying to do the right thing, but the complexity in the tax system means that they make mistakes.
If individuals are faced with having to pay a greater cost to obtain tax advice, it will mean some lower to middle income earners won’t be able to afford– or will choose not to – get the tax advice they should. This has deeper consequences for the overall functioning of Australia’s tax system.
If there is a problem with a small group of ultra-high wealth taxpayers claiming excessive deductions, then changes should target this group and not penalise ordinary Australians who are trying to do the right thing.
Greg Travers is the Group Director of Tax Services at William Buck Accountants and Advisors.