On Sunday 26 June, just six days before the federal election, the ALP’s Shadow Treasurer Chris Bowen unveiled the final pieces of their economic plan. I was alarmed by one piece of it, as were most, I think, of my colleagues and workmates. Mr Bowen announced they would save the government some money by placing a $5,000 cap on the amount individuals can claim for the cost of managing their tax affairs.
I don’t think that policy garnered much attention and, as we know, the ALP narrowly lost the election.
Soon after, on 24 August, Mr Bowen released the ALP’s Budged Repair Package on his website (http://www.chrisbowen.net/media-centre/media-releases.do?newsId=7198), containing many of the same policies that they took to the election, including the $5,000 cap on the cost of managing tax affairs.
If you pay an accountant to prepare your tax return you can claim that cost as a deduction in the year that you incur it in your tax return as a cost of managing your tax affairs. I think that’s obvious to just about everyone, but that’s not all that you can claim at this section of your tax return. If you see the ATO page regarding what can be claimed at this section you will see that there is quite a list (https://www.ato.gov.au/Individuals/Tax-return/2015/Tax-return/Deduction-questions-D1-D10/D10-Cost-of-managing-tax-affairs/).
Reading that list, you will see that what you claim might not always be as simple as what we charged you to do last year’s tax return.
Some might not have a problem with a limit, like this gentleman: …
……because if you never want to pay your accountant more than $250, then your tax affairs will always be pretty simple. Not that there’s anything wrong with that. Some people will be able to achieve all they want or need with simple tax affairs.
One thing I’ve found in my eight years at Optima Partners is that those clients of ours who aim to increase their wealth and improve their economic situation usually end up paying plenty more than that because they see value in the professional advice and opinions we can provide.
The reason I find this proposed cap to be disturbing is because of all of the other things that can be claimed at that section of your tax return.
In recent years, the ATO has adopted the practice of attempting to manipulate public opinion by releasing reports like this, omitting any context or even a reminder that tax is paid on profit, not revenue. They did something similar when releasing this report and I think that this is done to push an agenda to limit what all taxpayers can claim as deductible expenses by shaping it as major companies and high net worth individuals cheating the system.
Even Peter Martin, the writer of that Sydney Morning Herald article, doesn’t seem to understand what can be claimed at that section. He writes “they each paid an average of $1 million to an adviser prepared to help to bring down their taxable income” despite everything listed on the ATO’s website. Then again, I think I view things very differently to Mr Martin. Whereas he says:
…. I would say that the number of taxpayers affected by a change to any tax law is irrelevant to the integrity of Australia’s tax system.
Now, I’d be shocked if the 55 people who earned at least $1m but after deductions had taxable income below the tax-free threshold weren’t all audited. Claiming $1m as a deduction for the cost of managing tax affairs is mind-boggling, but if their deductions are legitimate it would be proven by an audit.
Audit is the process that is meant to happen in that instance, not chipping away at the allowable deductions for all taxpayers. There is a trend of some allowable deductions being argued to be unfair because not everyone has the ability to claim them, and that threatens all allowable deductions.
Massive deductions on that scale might already be the result of an audit. Perhaps an audit that went against the taxpayer, resulting in massive general interest charges, which have a rate almost as high as most personal loans, or they incurred large legal fees.
Limiting the cost of managing tax affairs to $5,000 hands great power to the ATO because it makes it harder to keep them accountable by objecting against decisions they make. The ATO need to be kept accountable by taxpayers & citizens because the ATO only administers the law based on their interpretation. The ATO is not part of the legal system and the costs a taxpayer might incur disputing anything with the ATO must remain completely deductible in a fair tax system.
Take the ALP’s plan for negative gearing: it would only be available to newly-constructed dwellings from the time of implementation, but anyone who has a negatively geared rental properties at that time may continue to claiming those losses. But that’s just the first change. What’s the stop further limitations in future?
In the current environment of fragile government, sub-standard journalistic reporting and media manipulation, all deductible expenses are under threat. A limit to the cost of what can be deducted for the cost of managing your tax affairs might just be the crack in the dam that leads to it breaking.
If you need any advice, feel free to give us a call 🙂 08 62672200
DANIEL CAUSERANO ,CPA