Effect of Specific Deductions on Australian Individual Taxpayers

This paper analyzes the impact of specific deductions on Australian individual taxpayers and recommends abolishing work-related expense deductibility. It includes a literature review, methodology, and statistical analysis of taxation statistics from 2011-12 to 2015-16. The research question is limited to the effect of specific deductions on income tax return filing of Australian individual resident taxpayers.

professional project
S P E C I F I C D E D U C T I O N S Effect on Individual Tax Payers in
Australia
MAY 31, 2018
STUDENT

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Table of Contents
Introduction..................................................................................................................................1
Aims and Objectives....................................................................................................................2
Research Question........................................................................................................................2
Literature Review.........................................................................................................................2
Methodology................................................................................................................................5
Data Collection.......................................................................................................................5
Statistical Analysis..................................................................................................................5
Secondary Data............................................................................................................................5
Taxation Statistics 2011–12...................................................................................................5
Taxation Statistics 2012–13...................................................................................................5
Taxation Statistics 2013–14...................................................................................................5
Taxation Statistics 2014–15...................................................................................................6
Taxation Statistics 2015–16...................................................................................................6
Findings and Analysis..................................................................................................................8
Discussion....................................................................................................................................9
Taxation of Income from Savings.........................................................................................9
Examining the Fairness of Superannuation.........................................................................9
Employment Related Expenses...........................................................................................10
Income Splitting...................................................................................................................11
Bracket Creep.......................................................................................................................11
Conclusion.................................................................................................................................11
LIST OF REFERENCES...........................................................................................................12

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SPECIFIC DEDUCTIONS
Effect on Individual Tax Payers in Australia
Introduction
The system of taxation in Australia allows wage-earning taxpayers to claim certain
specific expenses, classified as Work Related Expenses (WREs), as deductions from
their taxable income. The Australian Taxation Office (ATO), the controlling authority,
has never been able to provide a rationale for these provisions. This paper looks into the
reasons behind the possible rationale, especially their effects on equity and efficiency of
the considerations. Although a broad analysis tends to suggest that the deductibility of
WREs has a neutral equity impact. But their impact on efficiency is more prominent, if
not controlled properly. The long-term effect can lead to disruptions in consumption and
production. When combined with their high compliance costs which the ATO has to
bear for implementing these provision, the findings, discussions and analysis of these
Specific Deductions justify the recommendation of this paper to abolish WRE
deductibility.
Aims and Objectives
This paper aims at understanding the Australian Individual Taxpayer’s trend regarding
Specific Deductions while filing their Income Tax Returns during the income years
2011-12 to 2015-16. This paper will analyze the trends by making a comparison on the
basis of male/female taxpayers and on the basis of deductions claimed on the basis of
income brackets and the quantum of deductions claimed.
Research Question
On the basis of the aims and objectives, the research question has been limited to –
“Effect of Specific Deductions on Income Tax Return Filing of Australian Individual
Resident Taxpayer”.
Literature Review
The present structure of Australia’s taxation system is reliant on the nineteenth century
rulings when each of Australia’s six states (then referred to as colonies) had a very

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distinct tax system and this was entirely dependent on imposing customs and excise
duties. Reinhardt & Steel, 2006 have pointed out in their paper “A brief history of
Australia’s tax system”1 that the aim of imposing the tax system was driven by the
administrative concerns of the authorities, rather than on principles of equity or
efficiency. Reinhardt & Steel, 2006 further state that the major changes in the
administration of taxes took place between 1915 and 1942. Although income tax was
levied both at state and federal level, it did not make things easier for individual
taxpayer and subsequently led to more complexity and inequitable taxation at the
individual taxpayer level.
Fiona Martin2, author of “The Socio-Political and Legal History of the Tax Deduction
for Donations to Charities in Australia and how the Public Benevolent Institution
Developed” is very sceptical at the ATO’s partisan outlook on taxation concerning
individual taxpayer. In her paper she points out how the contributions (termed as
donations) of individual taxpayers to specific charities is declared tax-free for the
recipients. This creates excessive burden on the individual taxpayer, who has to bear the
cost of this tax exemption. This is acting like a two-sided sword hurting the innocent
and obedient individual taxpayer (Martin, 2017). Taking her argument further, Martin,
2017 says that it is essential for the authorities to understand the implications of these
concessions, in particular the deductions allowed to donations. Martin, 2017 has also
pointed out that imposition of tax by a government is based on a social process and if
any contradictory rules are imposed, the taxpayer finds it difficult to understand why
taxation has been developed. Martin, 2017 says this makes it impossible for the
individual taxpayer to comprehend this kind of taxation system and how can such
dynamics bring about a change in the society. As per Martin, 2017, an understanding of
how and why the taxation system is developed and can precipitate a change for further
promotion and evolution of opinions, does have a big impact on fruitful future policy
directions.
According to Reinhardt & Steel, 2006, the biggest challenge for the Federation was to
create a two-tier system of government, wherein the States abolished the Customs and
1 This paper was presented to the 22nd APEC Finance Ministers’ Technical Working Group Meeting in
Khanh Hoa, Vietnam, on 15 June 2006.
2 Associate Professor, School of Taxation and Business Law, University of New South Wales, Sydney,
Australia.

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Excise duties and thus started the sharing of taxes between the Federal and State
governments. Federal controlled most of the direct and indirect taxes whereas the States
were given a free hand in levying State taxes. The biggest change, say Reinhardt &
Steel, 2006, occurred in the field of deductions, especially for individual taxpayers.
Every State formulated or offered concessions, depending on the socio-economic
pattern of its society.
As per Martin, 2017, Federal introduced the Payroll Tax in 1941 and this was fixed at
2.5% of an individual’s payroll. The individual taxpayer welcomed the ruling as it was
aimed at promoting Child Welfare Schemes in the Commonwealth, as per Reinhardt &
Steel, 2006. However, argues Martin, 2017, with surmounting tax competition between
the States and intense lobbying by big employers, it led to several exemptions and this
reduced the payroll tax base, greatly affecting the National Child Welfare agenda of the
Federal.
Reinhardt & Steel, 2006 are of the opinion that the scope of indirect taxes has grown in
Australia in relation to the country’s economic activities and majorly due to an increase
in revenue demands, both at the Federal as well as the State level. Martin, 2017 argues
that major fallout started happening between Federal and State government as was
evident from The Income Tax Act, 1907 (Vic), which was enacted by the State of
Victoria to amend the rate of income tax and to add certain provisions to its Income Tax
Act, 1895 (Vic). Martin, 2017 says that major changes were incorporated in those
sections which dealt mainly with deductions of various kinds. Under Section 3 of the
1907 Act, a provision was made for allowing deductions related to Contributions to
Charities or institutions of public service. However, admonishes Martin, 2017, it was
still a discretionary power in the hands of the administrators as to who will be the
recipient. The taxpayer, whose money was at stake, had no say in the selection of the
recipient.
According to Martin, 2017, the decision of the authorities to allow deductions for gifts,
was motivated by the beliefs of influential politicians who opinionated that allowing a
deduction to the taxpayer will motivate donations. But Reinhardt & Steel, 2006 do not
agree with this and state that although it comes across as a strong factor in favour of

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deductions, the Royal Commission on Taxation was not in agreement with it. Reinhardt
& Steel, 2006 also agree that this is an increased incentive towards avoiding taxation.
Professionals, such as doctors, are also affected by the deduction variations. According
to Bryan, 20123, Service Trusts are a good alternative for the doctors. They provide a
practice structure which allows the doctors to allow an appropriate distribution of their
income to family members who are in the lower marginal tax rates slabs. Says Bryan,
2012 that a family member, who takes care of the doctor’s diary and does some
administrative work in the office, can be paid by the doctor a moderate salary and which
the doctor can claim as a deduction.
Methodology
Data Collection
This paper is mainly reliant on the data published by the ATO4. The scope of this paper
being limited to Specific Deductions of Australian Resident Individual Taxpayers,
hence only data relevant to this scope has been taken for analysis purposes in this paper.
Statistical Analysis
Wherever found feasible, a comparative analysis of the available data which has been
found to be relevant to the aims and objectives and which satisfies the research question
has been conducted under the head ‘Secondary Data’.
Secondary Data
Taxation Statistics 2011–12
10.55 million Australian taxpayers availed deductions in their tax returns for the income
year 2011–12.
Per 100 people, 56 claims were from males and 44 from females. 58 claimed work-
related expenses and of these, amounts claimed were:
 Under $500 by 28 taxpayers.
 Between $500 and $1,000 by 9 taxpayers.
 Over $1,000 by 21 taxpayers.
3 https://www.mja.com.au/journal/2012/196/10/slash-your-tax
4 https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/

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Taxation Statistics 2012–13
11.50 million Australian taxpayers availed deductions in their tax returns for the income
year 2012–13.
Per 100 people, 52 returns were from males and 48 from females. 56 claimed work-
related expenses and of these, amounts claimed were:
 Under $500 by 19 taxpayers.
 Between $500 and $1,000 by 11 taxpayers.
 Over $1,000 by 26 taxpayers.
Taxation Statistics 2013–14
12.10 million Australian taxpayers availed deductions in their tax returns for the income
year 2012–13.
Per 100 people, 53 returns were from males and 47 from females. 59 claimed work-
related expenses and of these, amounts claimed were:
 Under $500 by 21 taxpayers.
 Between $500 and $1,000 by 9 taxpayers.
 Over $1,000 by 29 taxpayers.
Taxation Statistics 2014–15
12.80 million Australian taxpayers availed deductions in their tax returns for the income
year 2012–13.
Per 100 people, 50 returns were from males and 50 from females. 62 claimed work-
related expenses and of these, amounts claimed were:
 Under $500 by 26 taxpayers.
 Between $500 and $1,000 by 12 taxpayers.
 Over $1,000 by 24 taxpayers.
Taxation Statistics 2015–16
12.86 million Australian taxpayers availed deductions in their tax returns for the income
year 2012–13.
Per 100 people, 52 returns were from males and 48 from females. 66 claimed work-
related expenses and of these, amounts claimed were:
 Under $500 by 24 taxpayers.
 Between $500 and $1,000 by 11 taxpayers.
 Over $1,000 by 31 taxpayers.

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Source: https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/
Taxation-statistics-2013-14/?anchor=Individuals#Table4
Table – 1: Individual Australian Taxpayers – Selected Deductions
2011-12 to 2013-14 Income Years
Source: https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/
Taxation-statistics-2014-15/?anchor=Individuals#Table4
Table – 2: Individual Australian Taxpayers – Selected Deductions
2014-15 to 2015-16 Income Years

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Findings and Analysis
The ATO keeps on looking for new areas for cutting down on individual taxpayer’s
take-home-pay amount, (Bobek, Roberts & Sweeney, 2007). This is done in two
different ways. First one concerns lowering of the various applicable threshold limits
and the second one is connected with taking out more and more of the amounts spent by
the individual taxpayer from the realm of deductions, (Wenzel, 2002). In the literature
review section of this paper I discussed about most of the deductions being pushed out
of the ambient of charitable contributions and charging the amounts as taxable at the
hands of the individual taxpayer, (Marriott & Sim, 2016). I want to highlight another
such anomaly being brought to practice by the ATO and this concerns the
Superannuation Contributions. With effect from 1 July 2017, Division 293 threshold has
been reduced to $250,000, from its prior limit of $300,000. Although it applies to high-
end taxpayers, nonetheless, it does show how the ATO is not missing any chance of
tightening its control over individual taxpayers, (James, Wallschutzky & Alley).
I found a very interesting explanation of this on the home page of Division 293 on ATO
website. It explained that although the threshold limit had been reduced by $50,000, the
individual taxpayers were still saving on their tax liability, (James, 2016). The argument
given was that despite being under the highest tax slab of 45%, the taxpayers are being
charged tax only at 15% on amounts which exceed Division 293 threshold, (Lund,
2003). This is not the only case of tightening the noose of tax around the individual
taxpayer’s neck. Another important one relates to maintaining a Home Office by an
individual taxpayer and claiming deductions, (Evans & Nam, 2011). The ATO divides
the expenses connected with Home Office into two broad categories – Occupancy Costs
and Running Costs. Rent, rates, mortgage interest, repairs and insurance are treated as
Occupancy Costs, whereas gas, electricity, cleaning and decline in value of the office
equipment are treated as Running Costs. Under the general deduction s.8-1 of ITAA,
1997, the individual taxpayer can claim only the apportioned value of the Running
Costs. To allow the Occupancy Costs, the ATO cites provisions of s.8-5 of the ITAA,
1997, where a distinction has been drawn by ATO between use of a home office as a
place of business and a home office being used just for convenience, (Black, 2016).

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Discussion
The Honourable Treasurer, Joe Hockey, on 30 March 2015, released Re:think - Tax
Discussion Paper5. The purpose of this Tax Discussion Paper was not to recommend
any specific changes in Australia’s tax system. Instead the Honourable Minister
intended to generate an open discussion about the future direction to be taken by
Australia’s tax system. I am discussing some of the relevant portions of this paper,
which I found quite pertinent to the topic of this paper, (Burman, 2009).
Taxation of Income from Savings
I am highlighting this aspect because income is the basis for a deduction. The
Discussion Paper has outlined certain disparities when ATO taxes different incomes
which are derived as a result of savings, such as interest earned, franked dividends and
rental incomes, (Saunders, 1982). In all these incomes, the role of dividend imputation
system explained by the ATO is the main contributor to these disparities. Apart from
creating disparities, this anomaly imposes huge compliance costs, both on the taxpayers
and governments, (Warren, 2016). This factor has also created a bias for the Australian
resident taxpayers as they are forced to invest more in Australian shares than in
investments connected with foreign companies, (Cho, Li & Uren, 2017).
In the opinion of this paper, this disparity can be removed by introducing one rate of tax
for all kinds of incomes derived from savings. Moreover, all incomes from the savings
need to be taxed separately from other incomes, such as employment income. Along
with this, the deductions also need to be treated separately in respect of the savings
income, (McGregor-Lowndes, Newton & Marsden, 2016).
In the opinion of this paper, there are at least three examples of other countries which
have successfully changed the taxation treatment of dividends. The UK has introduced a
partial imputation credit, whereas in Norway there is no imputation and the shareholders
are granted exemption from taxation on dividends and finally in Germany, taxation of
dividends is done at the company as well as at shareholder level, (Bryan, 2012).
Examining the Fairness of Superannuation
As pointed out in the Literature Review, Superannuation is an important segment of
savings for an individual taxpayer and needs to be addressed earnestly, (Hubbard &
Skinner, 1996). This segment needs to be properly alienated with the requirements of
5 https://www.macquarie.com/au/advisers/expertise/strategies/time-to-rethink-the-australian-tax-system

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Australia’s aging population. In the recent Intergenerational Report of the Australian
Government published in 2015, it has been stated that number of Australians of age 65
and above, are expected to be more than double by 2055, (Black & Krever, 2006). This
will automatically lead to a decline in the number of active workers and would also
place a heavy dependence of this large aging people on the superannuation system,
(Sakurai & Braithwaite, 2016).
It is already an established fact that superannuation is among the most preferred savings
vehicle for individual taxpayer in Australia mainly because of its low rate of tax on the
contributions as well as earnings, which are currently being taxed at the concessional
flat rate of 15%. Although this is greatly favoring those in the high income brackets who
receive the largest tax benefit because of their relatively high marginal tax rate, which
can go up to 45% currently, when they invest their savings in the superannuation funds
and pay only 15% tax, (Blackley & Follain, 1996).
In order to remove the disparity between the lower slab taxpayer and the higher slab
taxpayer, The Discussion Paper does advocate for removing the disparity and admits
that opportunities do exist in improving the superannuation system. This topic was also
raised in the recommendations made by the Henry Tax Review (Australia’s Future Tax
System Review, Australian Government 2010). The Discussion Paper too raises those
issues and also reiterates the recommendations of the Henry tax Review by making a
strong appeal for doing away with these differential earnings tax rates across
accumulation, at 15% and retirement at 0%, and also in fair distribution of all
concessions uniformly across all segments of superannuation taxation.
Employment Related Expenses
A large number of taxpayers are claiming a variety of tax deductions spread across a
wide range of Workplace Related Expenses (WREs) and this is adding complexity to
the process of preparing the tax return for them. In The Discussion Paper many options
have been proposed to address these issues, but still, The Discussion Paper does
recognize a need for balancing the compliance costs of the complexities with the cost to
revenue of the Government.
In The Discussion Paper a number of options, prevalent in developed countries have
been suggested –

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 No Deduction for WREs.
As is prevalent in New Zealand to disallow WRE deductions since 1980.
 Specific Deduction for WREs.
As is in the UK, which allows a WRE to the extent it is directly related to
generation of an assessable income.
 Standard Deduction for WREs.
As was suggested by former Labor Treasurer, Wayne Swan, who proposed, in
2010, a standard deduction of $500 for every taxpayer.
Income Splitting
Income splitting is termed as income attributed to more than one individual taxpayer.
The Discussion Paper offers an example by considering a couple, who jointly have an
income of $100,000. In case only one member, the husband, earned this income, his tax
liability would be $24,632. However, if both members, the husband and the wife, earned
and each contributed $50,000 and filed their returns as individuals, their total tax
liability would be $15,594 (each being taxed $7,797). Hence, jointly earning, the couple
would be in a better position and would save $9,038 in taxes. To give the best advantage
to every family, The Discussion Paper suggests a legitimate strategies of reducing the
tax liability of a household, without reducing the actual income and staying within the
legal boundaries of anti-avoidance and other integrity laws.
Bracket Creep
The ‘bracket creep’ of the Marginal Tax Rate regime shifts taxpayers to the higher tax
rate as and when the income increases over time. The Discussion Paper projects that
percentage of taxpayers in the two top tax brackets shall increase from the current 30%
to 45% in 2025. It has also been observed that ‘bracket creep’ affects those in the lower
and middle income brackets more than those in the higher income brackets.
Conclusion
As has been pointed out in the various parts of this paper, the Australian Individual
Resident Taxpayer has been and still is at the mercy of the political administrators who
control the system, make rules and govern the lives of the citizens. Contrary to the
expectations which every taxpayer has from taxation laws, Australian resident taxpayers
have no say in the rules and laws which are imposed on them. Purpose of deductions,
from the point of view of the taxpayers, should be to allow the taxpayer to use such
amounts as per their desire and requirements, (O'Donnell, 2005). But contradictions are

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there at each and every step. Even if a deductible amount is solely allowed for the
benefit of the taxpayer, the ATO tries to compensate that deduction by imposing a tax of
equivalent (sometimes of more) amount so that the coffers of the Revenue Department
do not become empty, (DiPasquale & Wheaton, 1992).
In the opinion of this paper, advantages should be given to law abiding taxpayers
without a lurking disadvantage around the corner for them. In fact, each amount spent
by the government, which is for the benefit of the citizens, should be pre-approved by
the citizens and not simply ratified by the elected representatives, who take the reins of
the law in their hands and start behaving as masters instead of acting as servers.
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