Tax advice cap: limiting deductibility when taxpayers most need it

A plan to limit deductions for tax advice to A$3000 a year is running into some opposition.

Opposition is building to proposals to limit the tax deductibility of providing tax advice, with CPA Australia members raising concerns about unintended consequences for individuals and small businesses.

By Zilla Efrat

The Australian Labor Party’s (ALP) plan to limit deductions for tax advice to A$3000 a year has raised the ire of the accounting profession with concerns the move will boost non-compliance and prevent people from seeking guidance when they most need it.

The ALP says the cap is necessary to stamp out tax abuse by high net wealth individuals. In his 2017 budget reply speech, opposition leader Bill Shorten justiļ¬ed it by citing 48 taxpayers who earned an average of nearly A$2.3 million in 2014-15, but paid no tax.

However, Paul Drum, CPA Australia head of policy, believes the proposals need a lot more work.

He says the A$3000 cap appears to be an arbitrary figure.

“It was A$5000 when the Labor party originally announced it a couple of years ago,” says Drum. “The party has just changed it to A$3000 because it needs more money to fund other initiatives, like hospitals and schools, should it win the next election. It does not appear that a lot of science has gone into arriving at the figure.”

Cutting tax deductions

Additionally, talking in averages can be misleading, he says. Many Australians go through significant one-off life events such as a divorce, inheritance or retirement, when they require specialist advice that could cost well over A$3000.

“These matters are not resolved for A$200 at your local bulk tax return processor,” says Drum. “They are complex matters. It would be very dangerous if such a policy, in its worst form, drove people to non-compliance.”

He says CPA Australia members have raised concerns that taxpayers might be forced to do their own returns or seek a cheaper option, perhaps through someone not qualified, or may get bad advice that leaves them with significant economic losses they otherwise would not have had.

CPA Australia notes that if the intent of the policy is to target people who are engaged in aggressive tax planning, then it should focus on those people.

It believes a targeted approach would be more appropriate – for example, providing the Tax Practitioners Board with the resources needed to actively investigate tax agents who may be assisting their clients in taking a more aggressive tax planning position.

“This policy, as it stands, will affect everyone,” says Drum. “It has significant economic implications, particularly for small businesses but also for the accounting and legal advisory world.”

Business tax consequences

A small business, for example, may hire an adviser to provide whole of business advice during the year in addition to filing an annual income tax return. The adviser may then also help with capital gains tax (CGT), lodging activity statements and compiling returns for a partnership as well as a trust.

“It’s very easy to get over A$3000 for business advisory services,” says Drum. “Some small businesses may say that if they can’t get the deduction, they don’t want the service, to the detriment of their businesses and economic wellbeing.

“This will, of course, also affect the bottom line and revenue of the accountants and lawyers that provide the services.”

CPA Australia members have cited examples where the costs of tax advice could surge well beyond A$3000.

One is where a client submits several years’ worth of tax at one time. One member recently reported compiling a client’s returns for 19 years in one hit. Capping the deduction could discourage people from getting their lodgements up-to-date.

Another member’s client had five rental properties and required advice on an employment termination payment and a CGT event on the sale of a property.

Tax costs of business

The costs of setting up or dissolving a business, or advice on the tax effect on multiple superannuation accounts could also exceed the proposed cap. If sole traders are included, their tax advice costs could well be higher than average.

An analysis  by The Australia Institute of Australian Taxation Office (ATO) statistics found that about 47 per cent of taxpayers claim a deduction for tax advice. While the average (mean) deduction was A$378, the median was much lower at just A$165, suggesting that a small minority are dragging the average up.

However, Drum believes the ATO’s figures don’t reflect the full story of where costs are claimed in a tax return.

“There appears to be a misunderstanding of what the cost of managing tax affairs (COMTA) provision is there for and what is claimed under it,” he says.

“A lot of people would not claim under the COMTA label and are claiming under the general deductibility rule instead.”

Examples of areas where confusion can occur here include a A$1 million bill for advice relating to litigation with the ATO or a hefty interest bill for a late payment to the ATO.

“If Labor gets in, I would think this proposal would need to go to a parliamentary committee so that there can be a proper discussion about it and an opportunity to go through all the examples,” says Drum.

“It will get back to design issues. We need to home in on whether this is about wealthy families who are overclaiming or have aggressive tax planning. It should not be a one-size-fits-all plan for all Australian businesses and taxpayers.

“CPA Australia will continue to represent members’ interests on this and other policies we are not supportive of, including imputation credit changes, taxing trusts and changes in CGT and gearing.”

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February 2019
February 2019

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