In 2010, the Henry Tax Review recommended the government introduce such a system, finding our personal income tax system had become “inordinately complex”.
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The review noted that “For many people, the personal tax system is complex not only because of the rates scale and the lack of a coherent definition of taxable income, but also because they must deal with a large suite of complex deduction rules, numerous tax offsets and a variety of exempt forms of income.”
That same year, the then treasurer Wayne Swan even went so far as to put a standard deduction plan into the 2010 budget. Under his plan, people would have been able to make a $500 standard deduction for work-related expenses and the cost of managing their tax affairs for the 2012-13 financial year, with the deduction increased to $1000 the following year. Unfortunately for us all, Swan abandoned the measure as he sought to deliver a budget surplus (which he never did).
Fourteen years on, the issue remains.
Last week in an address at the National Press Club, outgoing tax commissioner Chris Jordan related his own experience with a simplified tax system to highlight the issue, using his son, who lives and works in New Zealand, as an example.
According to Jordan, his son received an email of his proposed return from the Kiwi tax office with a refund amount he was set to be paid. “If you disagree, let us know. Otherwise, it will be paid into your account in two weeks’ time or something,” Jordan said, highlighting the simplicity of the system.
A major roadblock in adopting the system proposed by Swan and Henry, according to Jordan, is our love of work-related tax deductions.
In the 2020-21 financial year, 9.6 million Australians made $23 billion worth of work-related tax deductions, while about 6 million made a deduction specifically for the cost of managing their tax affairs, which translates to using an accountant.
In the five years leading up to the 2020-21 financial year, Australia’s population grew about 5 per cent. Yet, the number of people claiming work-related expenses grew almost twice as much.
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To the credit of the ATO, much has been done over recent years to simplify the tax return process. Returns are pre-filed, the app is easy to use and simplifies the claim process. Yet, Jordan still can’t believe how many people use accountants when so few people actually have complex tax affairs.
The other problem (depending on how you look at it) with Swan’s proposed standard deduction was that it was going to cost the budget about $1 billion a year because so many people – freed from the tax process – were going to get a fatter return.
Being better off financially and dramatically simplifying the tax system so the ATO could focus on bigger fish trying to avoid their tax responsibilities? That’s real tax reform.
Shane Wright is a senior economics correspondent.
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Source Agencies
