A host of work-related tax deductions claimed by individuals every year that amount to tens of billions of dollars could be scrapped and replaced with low personal tax rates, submissions from Treasury and business groups to the Turnbull government's inquiry into tax deductibility show.
In a bid to address bracket creep – where wage inflation pushes people into higher tax brackets – Treasurer Scott Morrison has said the government would consider introducing personal tax cuts as part of its upcoming tax review.
But such cuts will have to be funded by either increasing the GST or clamping down on tax breaks that benefit the rich, such as superannuation concessions, negative gearing and the capital gains tax discount.
Australian Taxation Office statistics show that in 2012-13, total deductions of $31.3 billion were claimed by personal taxpayers against $704 billion in taxable income.
Work-related expenses comprised nearly two-thirds of total deductions claimed. Of 12.8 million individual tax returns lodged that year, $19.7 billion was claimed in work-related expenses.
The most common type of work-related expenses was for car expenses, totalling $8 billion, followed by "other" (comprising home office costs and tools, equipment and other assets) of about $7 billion, work-related travel expenses of about $2 billion, uniform costs totalling $1.6 billion and work-related self-education costs amounting to $1.1 billion.
Rich push the boundaries
After work-related expenses the next biggest deductions in 2012-13 that people made were for personal superannuation contributions of $2.9 billion, and managing tax affairs and charitable gifts/donations, each comprising about $2.3 billion.
Treasury's submission to the House Standing Committee on Economics, which is holding the inquiry, notes that "deductions can provide tax planning opportunities for some individuals".
"Some individuals may attempt to push the boundaries by increasing the value of their deductions," the submission said.
It states that "deductions also provide a greater benefit for higher-income earners, as they reduce the tax payable by marginal tax rates".
The PBO and Treasury note that a number of Organisation for Economic Co-operation and Development countries have dealt with this by having tighter definitions for work-related expenses or by making use of a standard tax allowance for employment income.
For example, in Britain claimable expenses must satisfy a stringent test of being incurred "wholly, exclusively and necessarily in the performance of an employee's duties".
"While the UK approach does not reduce the compliance burden for those people who specifically claim work-related expense deductions, it does narrow the deductions that may be claimed, which may in turn reduce the number of claimants and the aggregate compliance burden imposed by the tax system," the Treasury submission said.
New Zealand does not allow any work-related expense deductions for employees. It scrapped them in the late 1980s, to broaden the tax base and to fund a reduction in personal income tax rates. As a result, in the 2012 tax year about 1.25 million individual tax returns were filed out of an estimated 3.3 million individual taxpayers.
By contrast, in Australia in the 2012-13 income year, 12.8 million individuals lodged tax returns out of 14.6 million working-age individuals.
Employers, pay up
Treasury's submission says that changing the rules for work-related deductions could "provide a greater incentive, where possible, for employees to re-characterise themselves as contractors".
It also cautions that any changes to the arrangements for deductions will need co-ordination with the fringe benefits tax (FBT) regime, which allows certain benefits to be provided from employers to employees.
Chartered Accountants ANZ submission to the inquiry says there is merit in removing deduction entitlements in exchange for lower rates of personal taxation.
"These personal tax rate cuts would need to be sufficient to wean Australians off the sense of entitlement that now exists towards work deductions and tax refunds," the submission said.
Chartered Accountants ANZ national tax leader Michael Croker said there might be a case for more employers to offer deductions for items such as work uniforms as part of their employment if they did not do so already.
But the Australian Chamber of Commerce and Industry's senior manager, economics and industry policy Tim Hicks says any substantial change to deductions will be premature without evidence to suggest that a significant proportion of such deductions are being claimed inappropriately.
"In practice it is hard to make sure that only legitimate deductions are claimed" and "restrictions around what can be claimed and integrity measures create complexity and compliance costs", he says in the submission.
There is also a risk that employers will be forced to fill the funding gap left by the removal of deductions, he says. "This may be particularly problematic for small businesses that have less negotiating power."
Negative gearing costing us
Other submissions to the inquiry call for the government to scrap or at least restrict tax breaks benefiting the rich, including superannuation concessions, negative gearing and capital gains tax.
In 2012-13 rental expenses of $41.7 billion were claimed against $36.5 billion of rental income. Two-thirds of 1.9 million taxpayers recorded losses of $12 billion.
Australian Council of Social Service chief executive Cassandra Goldie says in her submission to the inquiry that superannuation tax concessions cost the federal budget almost $30 billion a year in foregone revenue, with about 50 per cent the value of of these concessions accruing to the top 20 per cent of taxpayers.
And tax deductions for housing, including the 50 per cent capital gains tax discount for investors, combined with negative gearing arrangements, come at an estimated cost of about $7 billion a year. Half the value of tax deductions for rental property investment losses went to the top 20 per cent of taxpayers earning $80,000 or more in gross income, she says.
"Current settings are both inefficient and inequitable."
The submission also notes that the wealthy use trusts to avoid income tax by splitting income between family members. "ACOSS proposes that the tax treatment of private and discretionary trusts and companies be tightened to reduce the tax avoidance opportunities."
But ACCI and Industry says scrapping negative gearing could result in higher rents, and worsen housing affordability.
"Investors require a return on their investment and the return is considered on an after tax basis," the ACCI submission says.
"A higher tax burden would require a higher pre-tax return. In a situation where there is a relatively tight rental market, as is the case in most capital cities, there is a substantial risk that investors would simply offset the increased tax burden with higher rents."