Limiting Work Related Expenses to a Standardised Dollar Amount

Taxation is an important government's legal function as it sets the amounts raised to fund different projects and offers services to the public. A significant proportion of government spending comes from taxes. A bad tax system can therefore prevent the state from properly performing its duties. The recent decision by the Australian Taxation Office (ATO) to limit business-related expenses to a standardized amount in a bid to improve tax efficiency has sparked a heated media debate that has attracted much attention around the world. . system. $500 and $1000 figures already suggested as the possible standard amounts for the cap of claims on work-related expenses deductions.

Treasurer Scott Morrison pushed a government enquiry to establish the possibility of scrapping the deductions on work-related expenses claimed by individuals annually (News, 2017). The tax office claims that the deductions on work-related expenses are over-claimed by Australian individual taxpayers. The Australian Taxation Office targets to reduce approximately $22 billion of work-related tax deductions annually, and introduce a standard dollar amount of tax deductions for individuals and small businesses (Pash, 2014). This approach may increase the amount of tax paid by small businesses and individuals, but it may be compensated by lower tax rates.

The new plan is good for the government because it reduces the tax gap by ensuring that everyone pays their share of taxes as required by law; but the tax system should be improved to become a more progressive one so that big businesses can also pay their fair share of taxes.

Work-Related Deductions within the Australian Concept

One of the top work-related expense deductions targeted by ATO within the Australian concept is car expenses deductions. The largest amount of work-related expense claims made by Australian individuals annually are claims for car expenses, which is approximately $8 billion every year (Khadem, 2016). According to ATO, the new tax system would scrap claims on transport expenses from home to work unless the home is a workplace. The car expenses claims only apply to travelling expenses from one workplace to another workplace of the same employer.

The bulky goods transport expenses are also tax deductible under the Australian tax system. The new proposed system requires individuals to claim deductions for only those expenses incurred when transporting all tools and equipment to work as required by the employer as part of the employment duties; not just as a matter of choice or convenience (Kimmorley, 2016). An individual claiming deductions for the transport of bulky goods must also show that the goods were necessary for his income, such that if the goods were not transported he would not earn income. He or she must also establish that it was not secure to store the goods at work, and that they were difficult to transport.

The Australian tax system also provides tax deductions on travel expenses involving travel and accommodation. Every year the Australian Tax Office receives work related travel expenses claims worth approximately $2 billion. Individuals are allowed to claim tax deductions for expenses on accommodation and meals incurred while working away from home, and fuel and parking costs incurred during work-related trips. Khaden (2017) suggests that claims are made only on costs that are actually incurred, not including private components of work-related trips.

A significant portion of tax deductions in Australia also comes from internet and mobile phone expenses. The new standardized system does not entitle taxpayers to claim tax deductions on expenses incurred in private use of the internet and mobile phones (Acharya, 2017). The tax office apportions private and work use of internet and mobile phone for the purpose of standardizing the dollar amount of work-related deductions. The ATO allows individuals to claim tax deductions of up to $50 on expenses incurred in work-related internet and mobile phone use. However, the individual has to prove that the costs were actually incurred for work purposes.

Another class of work related deductions in the Australian tax system is clothing. The new policy requires taxpayers to claim deductions only if they incur clothing costs related to work uniforms containing company logo; claims should not be made for clothing that would be used outside the workplace. Expenses for laundering services may also be deducted as long as the costs are calculated using standard and reasonable methods.

Taxpayers may also claim deductions on home office and work equipment, and self-education expenses. Every year individual taxpayers make claims of up to $7 million worth of deductions in home office costs, and $2 billion claims are made on self-education expenses, which must be directly related to work. Such deductions do not include expenses incurred on courses that do not relate with current employment.

Benefits and Disadvantages of Fixing a Standard Amount of Deductions

The proposed changes on work-related expenses have various advantages and disadvantages for various stakeholders. One of the advantages of the proposed plan is that it reduces the tax gap between the amount collected by the tax officials and the amount that would have been taxed if the taxpayer had paid all taxes as required by law (Pash, 2014). In the current system, individuals have loopholes to claim more than they should by including expenses that relate to their private lives rather than those related to work.

The new plan also promotes efficiency in the tax system because it allows the tax officials to check the claims made by taxpayers effectively and ensure that they relate directly to expenses incurred in work-related activities. This efficiency of the tax system leads to increased tax revenue for the government to fund its projects and provide public services effectively. According to Chau (2015), the amount of over-claimed deductions are relatively small per individual, the overall revenue lost in the process have significant impact on the economy and the entire population.

The new system also has a positive ethical impact, and promotes discipline among taxpayers. Opponents of this plan argue that individuals and small businesses are targeted while large companies do not pay their fair share of taxes. However, Chau (2015) argues that the collective amount of money lost through over-claims of individual taxpayers is larger than the losses of larger markets. Furthermore, small businesses and individuals have the moral and legal responsibility to pay taxes regardless of the actions of large companies (Hasseldine, 2015).

The planned cap on tax deductions also helps in simplifying the tax system and reducing the tax burden for individual taxpayers (Mather, 2017). The plan gives individuals an option to claim the standard deduction each year; hence giving them an opportunity to keep their annual income tax returns in check. The cap will also give room for an income tax cut as promised by the government, which will encourage a win-win situation for the taxpayer and the government. Increased efficiency allows the government to increase revenue while easing the incoming tax burden for honest taxpayers.

Despite these benefits, the standardization of work-related expenses deductions may be disadvantageous in some ways. For example, it may act as a disincentive to entrepreneurship and investment (Keane, 2017). To avoid paying more taxes through the cap, individuals and small businesses may limit their productive capacity below the standard amount.

The new plan may also cause increased revenue for the government at the expense of households and small businesses which will have to pay higher taxes than before (Malley, 2016). Taxpayers are now limited in terms of the items that they will include while claiming for deductions; hence some of their expenses may not be deducted.

Opinion on the Plan

In my opinion, I think this is a great plan that has come at the right time for Australia. For a long time, people have been over-claiming work-related expenses by including items that are not necessarily work related. Paying tax should be the responsibility of every taxpayer, regardless of whether it is a small business, an individual or a large company. Each taxpayer has to carry out their legal duty of paying taxes as required by the law to help the government fund its projects, most which benefit the taxpayer in the long run.

It is important for the government to set a standard dollar amount for the work-related expense claims so that all taxpayers can claim the right amount of deductions; hence saving promoting an efficient and transparent tax system where all taxpayers contribute tax revenue to help the government provide services to the people. The new system also promotes simplicity and increases tax revenue by sealing loopholes for tax evasion by those who would like to use work-related expenses deductions to minimize tax payments.

In the media debate, some people have argued that the new plan is not fair because it does not affect large companies, and individuals end up paying more taxes. I think there is some truth to this claim, but two wrongs do not make a right. Every citizen of the country has both moral and legal responsibilities to live by the rules; hence each person has a moral responsibility to pay their equal share of tax. However, the Australian Tax Office should improve this plan to include a provision that will allow big companies to pay their fair share of tax. For example, a more progressive tax system may be implemented to allow higher income earners to pay more taxes in proportion to their income.

References

Acharya, M. (2017). Tax Time 2017: 11 work-related deductions you can’t claim. The Sydney Morning Herald, 22 Jun 2017.

Chau, D. (2017). ATO tax deduction warning for small businesses and individuals. ABC, 5 Jul 2017.

Hasseldine, J. (2015). Advances in taxation. Bingley, UK: Emerald.

Keane, A. (2017). Australian Taxation Office sharpens its focus on work-related deductions. Daily Telegraph, June 19, 2017.

Khadem, N. (2016). ATO's top five list of 'dodgiest' deductions claimed at tax time. Illawarra Mercury, August 16, 2016.

Khadem, N. (2017). Top work-related expense deductions the ATO is eyeing this tax time. The Sydney Morning Herald, June 29 2017.

Khadem, N. (2017). The $22 billion cost of work-related tax deductions to be tackled in federal budget. The Sydney Morning Herald, April 8, 2017.

Kimmorley, S. (2016). 5 work-related expenses the ATO is targeting this tax time. Business Insider, June 23, 2016.

Malley, A. (2016). Turnbull government's next target: limiting claims for work-related expenses at tax time. The Sydney Morning Herald, March 16 2016.

Mather, J. (2017). ATO's Chris Jordan vows crackdown on work expenses, negative gearing. Financial Review, Jul 5, 2017.

News (2017). Crackdown looms for work-related tax deductions. News, March 2, 2017.

Pash, C. (2014). You'll need To Be Especially Careful If you’re Claiming Work-Related Tax Deductions This Year. Business Insider, Jun 17, 2014.