Ever feel like doing your tax return is more hassle than it’s worth?
Sure, you could end up with a much bigger payday at the end of it. But life’s too short to spend hours tracking down receipts and logging the hours you work from home, which is why one think tank wants to eliminate returns for up to nine million people.
In a new report released on Monday evening, the Blueprint Institute has called for a standard tax deduction of $3000 for any taxpayer that wants to use it.
The deduction would cover work-related expenses and a range of other personal deductions, with Blueprint arguing this would give 80 per cent of taxpayers an extra $400 to $1000 annually and “pave the way to eliminating 7-9 million tax returns per year”.
Taxpayers who used the standard deduction would no longer have to submit an itemised list of deductions.
Blueprint estimates this would cut annual compliance costs for Australians by $4 billion, save us $750 million a year in accounting and legal fees, and cost the annual budget less than $5 billion.
“Research in the US, where the tax system is similarly cumbersome and a similar proportion of tax filers use a tax agent, pegs the [compliance] cost at around 0.7 per cent of annual income,” the report says.
“Put differently, average people would be willing to work 10 to 15 additional hours in order to avoid complying with the rules around deductions. This cost rises with income, consistent with the greater opportunity cost of time.”
In the Australian context, that suggests we’re collectively spending $5 billion on compliance costs every year.
So, how would a standard deduction work?
Blueprint wants the government to introduce a standard deduction of $3000 for personal income tax returns, which would equate to a $975 tax refund for someone earning between $45,001 and $120,000.
The tax benefit would be partly offset by the loss of their current deductions, and those with larger deductions would naturally benefit less from the scheme.
But Blueprint estimates about 11 million people would use the deduction and taxpayers with average deductions at all income levels would pay $400 to $600 less tax per year.
Under the think tank’s model, the government would keep the option of itemised tax deductions for those who prefer to use that method.
And the standard deduction would cover all forms of work-related expenses (car, travel, clothing, self-education), the cost of managing tax affairs and most supplementary deductions.
Gifts and donations and personal super contributions would be excluded. As would business costs, and expenses incurred while investing in property, debt and equities.
“It’s important also to consider that including a high-value item in the standard deduction might induce some people who otherwise might have taken the standard deduction to itemise,” the report says.
“This prevents them from benefitting from the reduced compliance costs the standard deduction would have brought to their other expenses.”
The standard deduction would apply unless a taxpayer provided details for individual deductions, allowing them to skip that section of the form.
Blueprint says in an ideal world the reform would be part of a broader overhaul that enables automatic preparation of taxpayers’ Notices of Assessment, sparing 7-9 million people from the entire tax return ritual.
How would it help the economy?
The think tank says the reform would stimulate the economy through lower taxation while also reducing the administrative and enforcement burden on the Australian Taxation Office.
The tax office costs us $3.8 billion a year and estimates that incorrect deductions for work-related expenses account for more than half of the nation’s $8.3 billion tax gap (defined as the gap between tax paid by individuals and the tax that legally should be paid by them).
Blueprint says the measure would also save participating taxpayers between 10 and 15 hours a year, freeing them up to focus on more productive tasks.
“A standard deduction would provide 0.5 per cent of GDP in additional economic stimulus, boosting economic activity and thus supporting the labour market recovery,” the report says.
“This too would generate additional tax revenue, offsetting some of the budgetary cost.”
Blueprint Institute chief economist Steven Hamilton told The New Daily it would effectively be a tax cut for Australians at a time when the government needed to stimulate greater consumer spending.
He said it was also well targeted, as lower-income Australians would benefit disproportionately given they tend to have lower deductions.
The Tax Institute has also advocated over the years for the introduction of a standard work-related deduction.
Scott Treatt, the institute’s general manager of tax policy and advocacy, said a standard deduction would simplify the system for large numbers of Australians and enable better analysis of the tax system, by allowing the tax office to more clearly work out who was claiming larger-than-average deductions.
But he said the measure would have to be implemented as part of a wider reform of the tax system, as it would have knock-on effects for other deductions, such as fringe benefits tax.