Effect of Specific Deductions on Australian Individual 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

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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.