Joint bodies flag potential issues with instant tax deduction bill

In a joint submission by the bodies, CPA Australia, CA ANZ and The Tax Institute outlined several recommendations, including applying a periodical indexation of the deduction, clearer explanatory materials and guidance and rectifying issues in the draft legislation that affect fringe benefits tax.

The submission warned that the removal of simplified substantiation provisions, such as the $150 launder expense concession, would make it more difficult for those who do not apply the standard deduction to claim deductions under other provisions.

“These concessions are still needed by taxpayers who choose not to use the $1,000 standard deduction and instead continue to substantiate their work-related expenses,” the submission said.

The EM stated that the introduction of the $1,000 standard deduction replaces the need for existing substantiation concessions, including the $150 laundry expense concession.

However, the professional bodies said that while this may be true for taxpayers who choose to rely on the $1,000 standard deduction, it is not true for taxpayers who choose not to use the standard deduction and instead continue to claim more than $1,000 of work-related expenses.

“These taxpayers will still be required to fully substantiate their work-related expenses and will continue to rely on existing concessional substantiation rules, such as the $150 laundry expense concession,” they said.

“Removing substantiation concessions increases compliance costs for taxpayers who do not use the standard deduction and removes long-standing simplification measures that remain relevant.”

Further, the submission highlighted that the memorandum does not clearly allow a choice of the standard deduction instead of a manual claim of work-related expenses.

“We recommend that [the memorandum] be amended to expressly recognise a taxpayer’s ability to choose whether to claim work-related expense deductions or rely on the standard deduction,” the submissions read.

It also emphasised that the two-week consultation period is not enough time for stakeholders to consider the proposal, noting the benefit of 30 days instead.

"Fulsome” consultation is crucial since the measures “introduce new interactions across the income tax and fringe benefits tax (FBT) systems, and affect a wide range of taxpayers and employers,” it stressed.

“While the proposed $1,000 standard deduction may provide compliance relief for some taxpayers, it does not address the underlying pressures in the personal income tax system,” the submission said.

“Ongoing bracket creep continues to increase average and marginal tax rates without corresponding increases in real wages. Incremental or isolated measures that focus on deductions do not resolve this issue,” it added.

“We consider that measures such as this should be part of a broader review of personal income tax rates and thresholds to improve fairness, transparency and sustainability,” it said.

Among its recommendations, the submission recommended that the draft explanatory memorandum and ATO guidance should clearly describe the standard deduction as optional, and “designed primarily to reduce record-keeping and compliance costs, rather than to increase the generosity of deductions.”

The proposal’s lack of indexation was another concern raised in the submissions. The bodies stressed that without indexation, real value would decline over time due to inflation, and recommended that the deduction threshold be indexed to the Consumer Price Index.

Further, it requested that amendment of 25-130(2) of the explanatory memorandum to recognise the taxpayer’s ability to choose to “claim work-related expense deductions or rely on the standard deduction”.

The bodies also pointed out that the proposal has been designed so that tuition fees could lead to the full reduction of the standard deduction. The submission stressed that if these fees cannot be claimed in addition to the $1,000, taxpayers can lose access to education. “This approach recognised the important role of education in improving skills, productivity and human capital.”

In the lead-up to the consultation period opening on 20 May, several accountants supported the proposal, saying it frees them up for tax return work that can be less lucrative for their practices.

However, in an op-ed to Accountants Daily, CPA Tax Leader Jenny Wong warned that the standard deductions could see taxpayers missing out on benefits if their potential returns exceed $1,000.

“This is about making the tax system simpler and delivering more lasting cost‑of‑living relief to taxpayers …. [It] will help workers cut back on the paperwork and save them time and money at tax time,” said Jim Chalmers, federal Treasurer.