The problem of work-related tax deductions.

Forty years ago, the majority of Australians completed their tax return forms themselves, with the help of a four-page brochure of instructions. Since the introduction of the "plain English" 100+ page volume of guidelines in the late 1980s, and despite supposedly higher levels of education, increasing numbers have felt themselves incompetent in the face of this annual task, and have turned to tax consultants for assistance.

I remember my feeling of impotent fury, when first confronted with the "plain English" guidelines, that what had been so simple had been made so baffling--it took considerable random search even to discover the address to which returns were to be sent. A decade or so later, however, it became clear that it was not just the TaxPack's design that was at fault, but that changes and complications introduced into the tax system itself had made the new tome of instructions necessary. As a result, large numbers of Australians were being driven to tax consultants out of fear of failing to claim for a novel array of deductions and offsets (formerly called rebates) and thus paying more tax than necessary.

The introduction of these new, individually targeted, deductions and rebates began at about the same time as an earlier generic system of deductions and rebates--largely supporting family incomes--was withdrawn, and over subsequent years they sprouted and specialised to reach their present level of complexity. Work-related deductions for wage-earners were probably introduced analogically to deductions for the costs of running a business, but in fact they have meant that, selectively, for some businesses and some types of employment only, business costs can be transferred from the company or employer to the individual employee, and thence to the general taxpayer.

The introduction of tax offsets in their present form appears to have followed the superannuation initiatives of the late 1980s, which attempted, with limited success, to move the growing aged population away from dependence on our long-established Old Age Pension scheme. However, their proliferation has, I conjecture, also aimed at lowering net taxes for certain categories of low-income people (but with marked variation in what is considered low), while avoiding the problem that in progressive tax systems a reduction in tax rates at the lower levels of income always delivers greater absolute, although not greater relative, benefits to higher incomes.

My criticism is not of deductions and offsets in themselves, but of the complexity and variability of the rules of eligibility and the rates applied in quite similar conditions and circumstances, and the fact that they often deliver insignificant monetary returns in relation to the difficulties of claiming them reliably via the services of tax consultants.

Work-related deductions

Let me give some examples of the baffling complexity of the claims rules as they relate to work clothing and travel.

Work-related clothing: The idea seems to be to allow claims only for clothing that will not be used in non-work conditions, even though we all have to clothe ourselves for both work and non-work. As fashions change the differentiations can become meaningless.

One can claim for purchase of overalls but not jeans. One can claim for purchase of boots but not shoes, with the exception that shoes can be claimed if specifically designated by the employer, even if they are of a type that could be worn socially. One can claim for uniforms, but not prescribed off-the-rack clothing, even if its style and colour are such as most people would never wear in private life; but normal clothing is defined as a uniform if it carries a work logo, no matter how inconspicuous.

One can claim for the cost of washing work clothes, even if carried out at home as part of the normal household wash, provided the clothes have been classified, as above, as work-related, but not otherwise. A modest maximum amount can be claimed without keeping formal evidence of the cost (an invitation to claim to the limit), but not if one has total clothing claims of over a certain threshold, in which case evidence must be producible.

Motor-vehicle expenses: There are four different methods of claiming for the cost of the use of one's own motor vehicle for employment purposes, varying from quite simple to very complex, but all need to be calculated to see which gives the best result.

Work- and education-related travel: Cost of travel to or from work, whether by private vehicle or public transport, cannot generally be claimed, nor can it generally be claimed for travel between two or more worksites on a regular basis. However, it can be claimed if travel between worksites is irregular. It can also be claimed from home to a second worksite, if home is a worksite and the day's work begins at home--but not for the return trip! These claims require informal record-keeping, which is difficult to validate or to contest.

But things are different for travel to a place of work-related education (defined as above). Cost of travel between home and place of education in either direction can be claimed, but not if the student continues on from college, etc., to work, or travels from work to college to home.

Domestic and overseas travel: Different maximum claims for the cost of accommodation and meals are laid down as "reasonable", depending on whether travel is domestic or international, and in the latter case, on the country concerned, and also on the claimant's salary--the higher the salary the larger the amount. They can be made without formal evidence, receipts etc.--a diary will do (again, an invitation to claim up to the "reasonable" limit). Refunds above the reasonable level are nevertheless claimable if formal evidence is kept (but it does not have to be sent in with the tax return, and usually will not be called for). Some claimants can virtually set their own travel requirements and claim back a substantial part of the cost at taxpayers' expense. This has been a great boon to the academic and professional classes who love to attend national and international conferences in locations often chosen for their holiday appeal. The academic overseas traveller who spends $10,000 on a trip "for research purposes" (when the internet, phone calls and inter-library loans would have served the purpose) and whose salary attracts the second top or top marginal tax rate will have about half of the cost returned in tax deductions.

It should be borne in mind that the refund gained from deductions is less, often much less, than the amount claimed, as the deduction is from taxable income, not from tax due. Thus the gain is only of what tax would have been paid on the amount of the deduction. For example, in the 2005/6 tax year a claim of $150 under work-related expenses by an outdoor worker for say, sunglasses, hat and boots, if he earned less than $40,000 and thus paid tax up to the second lowest rate of 30c in the dollar, only reduced his tax by $45, not $150. If this, as is likely, was his only deduction, he probably paid the tax consultant at least twice this amount.

Consultants obviously must charge for their services, and the tax reduction gained by the majority of taxpayers under the majority of these provisions is small, so the net effect is that much of the money the tax provisions intend to return to wage-earners goes instead into the tax consultant coffers. The client is not sufficiently au fait with the documentation to realise that there would have been a tax refund anyway due to overpayment in the course of the year, and that the balancing of the consultant's fee against the work-related deductions actually reduced, rather than enhanced the refund. Provided the outcome is one of no additional tax to pay, the client goes away happy, believing that the consultant has achieved this desirable outcome.

Tax offsets (rebates)

Tax offsets, unlike deductions, are deductions not from taxable income, but from the tax due on taxable income, and so represent in full their nominated monetary value--a tax offset of $150 means $150 less tax paid, not just a tax-rate-dependent proportion thereof. There is no problem with this taxation device as such. The absurdity lies in the use of a different percentage rate or flat but tapering rebate for virtually each different category of offset, together with different upper and lower thresholds, and rates of tapering, and in the very small relief in actual dollars they usually afford. A further complication is that offsets are not always calculated on Taxable Income, but may be calculated on Assessable Income or Separate Net Income, which differ from it in fiddly ways.

The percentage rate offsets have varied from 10%, through 17%, 18% and 20%, to 30%, with differing lower and upper thresholds or no threshold, and differing taper rates. Similarly the lump-sum offsets range from hundreds to thousands dollars. There are different ceilings for eligibility and different benefits for equivalent incomes. It is hard to find any real meaning in these differentiations. They appear merely random, plucked out of the air, or else "guesstimates" based on what it has been deemed affordable to relinquish from tax revenue. Although they deliver real benefits in some cases, in very many, perhaps a majority, the eligible offset is so small it will be eliminated by the visit to the tax consultant which the complications induce, making the whole thing a largely spurious exercise. If offsets are to continue they need to be bolder--of greater value and more selective.

The maze of detail and qualification, of rules and calculations, described above was entirely absent from our income tax returns four decades ago. Rebates (offsets) were modest, but absolute, not tapered, and eligibility accrued in relation to number of dependents on an income, not income below a threshold. Deductions (for educational and pharmaceutical costs, council and water rates, etc.) likewise targeted living expenses that increase with the number and type of dependents on the income being taxed.

A general awareness of the possibility of missing out in this jungle of tax regulation has driven large numbers whose tax returns need make no great demands on their capabilities to seek help from the tax consultant industry. Tax offsets, and likewise the Medicare levy and Family Tax Benefits, in fact only require that the taxpayer supply the simple facts of his or her personal situation--age, marital status, dependants, employment status, earnings and tax withheld--on the tax return. They can be, and are, computed by the Tax Office on the basis of this straightforward information alone, and although most people don't know it, tax consultants are not really needed for this purpose. The major obstacle is the superfluous requirement of placing code letters in boxes on the tax form, to summarise information already supplied.

The case against work-related deductions

This article should not be read as a general diatribe against tax consultants. There are areas of income tax, where income is not simply salary or wages with tax deducted pre-emptively (what used to be called PAYE--pay-as-you-earn, now PAYG): for example, retirement income from lump-sum investment and income from rental properties and shares, where the rules and calculations are bound to be complex. Most people will genuinely profit from this assistance, despite its cost, because both the income involved, and/or the potential savings, are large. But the flood of straightforward wage-earners into consultancies should be stemmed. It has been induced by the work-related deductions carrot and the tax offsets mysteries, and the daunting volume of instructions they now invoke--and does no one much good except the tax consultant.

Given the complexity of the rules that must be applied, and the individual interviews required, the fees charged by consultants are not unreasonable, but in many cases it would be more ethical if clients were advised to forget the deductions and submit their returns themselves. There are some positively unethical practices, such as special offers to young people at a cheap rate to lure them in, with the knowledge that their returns are usually very simple--and then an extra charge if they are not. There is an unstated pressure on consultant employees to produce at least a small refund--one can always throw in a briefcase or a pair of sunglasses to create the necessary minor deduction, without the need for receipts.

Work-related deductions mean that, selectively, a sub-set of businesses can transfer some of their costs first to the employee, and then via work-related deductions, to the general taxpayer who funds total revenue. They are expenses that should remain within the business tax sector. That is, they should be directly met by the employer, not by the employee; or else their cost to the employee should be recognised in the wages or salary offered. Work-related deductions have encouraged businesses to require employees to provide tools and protective clothing which, before their advent, would have been automatically provided by the company. (Some office employees are now even required to provide their own stationery.) This is made to sound reasonable to them, in their simplicity, when they are told they can claim the cost in their tax returns, when in fact they will only get back a percentage of the cost, and the lower their wages, the lower this percentage is.

Probably the worst case in this development is where employees provide their own car and petrol, say for a delivery job or working in home care (usually low-paid), and are led to believe that they will be fully reimbursed for this large expense by the tax system. Lost as this claim is in the intricacies of their consultant-completed tax returns, they have no idea that they have taken on the larger part of the cost themselves.

If work-related deductions were abolished, and tax offsets, based on income and domestic information as they are, were not featured on the form, most employees should again be able to complete their tax returns themselves.

Dr Lucy Sullivan is the author of Taxing the Family (Centre for Independent Studies, 2001). These observations of the effects of deductions and offsets on both taxpayer behaviour and refunds are drawn from a period of working for a tax consultancy.