Are big changes on the way to the tax deductions you can claim?
Is the federal government about to abolish your ability to claim deductions for work-related expenses?
In a recent report, the tax ombudsman, the Inspector-General of Taxation, suggested that the government consider reform of the work-related expense deduction regime, including the possibility of introducing standard deductions with a view to eliminating the need for most individuals to lodge income tax returns.
The theory is that a standard deduction would help to simplify the tax system.
It would certainly help the ATO, which is moving to pre-fill as much of your tax return as possible and would like to get to the point where tax returns are no longer needed because all the information about your income and expenses is already known to them.
The current system of deductions – whereby the type and amount of deductions claimed is unique to every taxpayer – is the biggest obstacle to achieving this.
What is a standard deduction?
At the moment you can claim a tax deduction for all expenses that you incur in earning your income. So all those expenses that relate to your job – such as the cost of uniforms or tools or using your private car for work trips – can be deducted.
The inspector-general’s proposal would end this system. Instead of claiming for the actual costs you incur, the government would allow all taxpayers to claim a standard deduction.
Exactly how much that would be is unknown but it could be anywhere between $500 and $2000 a year.
If you currently claim more than the amount of the standard deduction – as millions of taxpayers do – you’ll lose out.
Haven’t I heard this proposal before?
Almost certainly, yes.
It’s an idea that seems to crop up roughly every five years, whenever the government goes into tax reform mode.
The closest it has come to being implemented was nearly 10 years ago when the Rudd government proposed to give taxpayers a choice between claiming a standard deduction or sticking with the current system of claiming actual expenses.
The impact of that on taxpayer behaviour would be that those who claimed no deductions, or an amount less than the proposed standard deduction, would get a “free” tax cut, while those who claim over the standard deduction threshold would simply carry on claiming as they do now.
The cost to the government would have been horrendous and the idea was quietly dropped.
Is it likely to happen now?
Assuming the government doesn’t resurrect the old Rudd proposal – which is too expensive to administer – the impact of replacing work-related deductions with a standard deduction would hit many taxpayers.
It would particularly affect those in occupations where work-related expenses can be high, such as tradies (most of them have to buy their own tools, which can be expensive).
Neither side of politics wants to upset such a large number of key voters, and with an election looming the appetite for such a fundamental reform doesn’t seem to be there.
Of course, there would be winners, such as those who claim few if any deductions at present.
But even the winners might ultimately lose out. Just because you don’t make claims now doesn’t mean your circumstances won’t change.
We know that “standard” deductions and concessions are rarely increased once they have been set. While a $1000 deduction now might look tempting, it will be far less attractive in 20 years, when it’s still set at $1000!