Speaking at the Tax Institute and the Australian Tax Research Foundation 2017 forum, PwC director Joanne Dunne pushed for the current model of work-related expenses (WRE) to be abolished and to adopt the 2011 Exposure Draft legislation brought about by the Henry Review.
Total work-related deduction claims in 2015 were $21.8 billion, with $18.8 billion (87 per cent) from taxpayers not in business, an amount that Ms Dunne argued that contributed substantially to the tax gap.
Furthermore, Ms Dunne noted how work-related deductions diverted valuable government resources, and added to the costs of administering the tax system.
“Claims for WRE divert valuable government, ATO and court resources,” said Ms Dunne.
“You just type in WRE in the ATO website and you get 281 results including 40 interpretive decisions — one of them about a beverage analyst and the cost of purchasing wine for tasting, 91 case summaries, 84 public rulings, 40 other documents — the tax office needs to be freed up to do more important work than this.
“I think that the ATO's investigation costs will outweigh the tax recovered. We can save administrative costs if we following through on reforms.”
However, in reply, Ram Pandey, ATO principal lawyer, said putting an arbitrary cap on WRE would not be productive.
“A comprehensive income tax base must exclude consumption incurred in the process of earning income — we do it for companies, we allow them to deduct their expenditure they use to generate their income, we do it for individuals,” said Mr Pandey.
“Why do we do that? Well that's just a fundamental tenant of our system of income tax. It’s been around for a very long time.”
Mr Pandey noted that the system itself was robust for valid WRE claims but acknowledged that more needed to be done in educating and policing non-valid claims or phantom expenses.
He also pointed to the House of Representatives standing committee on economics report “Report on the inquiry into tax deductibility” (House Report) that made a recommendation to the government “not to alter the current arrangements despite evidence of a substantial increase in WRE costs”.
“Ultimately the report said it didn't want to tinker with the system too much, it was going to go ask the tax office to raise compliance, raise education and it was going to ask Treasury to come back with more concrete numbers about the tax gap,” said Mr Pandey.
Mr Pandey also further pointed to how WRE were found to benefit low income earners rather than the popular belief that it catered to high income earners.
“The house report said that the proportion in particular to self-education expenses, the proportion of low income earners claiming self-education expenditure as a percentage of income was greater for low income earners than high income earners — that is an amazing statistic,” he said.
“The jobs of the future are going to require people to educate themselves to change careers and the policy we have with the WREs, because it is sound policy and based on these golden threads, is uniquely positioned to allow people to go away and do their self-education and train themselves for jobs of the future.
“You go and put an arbitrary cap and you are cutting your feet off. The government is never going to directly subsidise self-education and training.”
Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.