What Does the Proposed $3,000 Deduction Cap on Managing Tax Affairs Mean for Small Business?

Under current laws (as of February 2019), taxpayers can claim unlimited deductions for managing their personal tax affairs. This includes the completion and lodgement of tax returns, getting advice from a tax adviser, and litigation expenses such as the Administration Appeals Tribunal. The Labor Party proposal would cap the amount an individual can deduct for managing tax affairs at $3,000. So if a person spends more than $3,000 to manage their tax, only the first $3,000 of their spending would be tax deductible. 

In announcing the proposal, Labor Party leader Bill Shorten mentioned that 48 Australians earned more than $1 million in 2014-2015 but paid no tax. He noted that these people deducted their income down from an average of $2.5 million to below the tax-free threshold. In addition, 2,458 people claimed over $25,000 in deductions each for managing their tax affairs, while the average deduction for managing tax affairs was $378 in 2014/2015. Mr Shorten also mentioned that fewer than 1 in 100 taxpayers will be affected by the changes that will save the budget $1.8 billion over a decade.

Much of the criticism of the proposed changes have been coming from professional tax accountants, including the Institute of Public Accountants (IPA) and Chartered Accountants. According to IPA CEO Andrew Conway, the proposed changes would have a ‘disastrous impact’ on the community. Mr Conway noted that people deserving a tax deduction, including small business owners, would not be able to get a tax deduction.

From the perspective of accountants, a $1 million fee for handing tax affairs is very rare should not be used to justify a deduction cap for all taxpayers.

According to Michael Croker, Chartered Accountants Tax Leader, ‘Tax law is complex, and there are many situations where fees can exceed $3,000. Tax disputes with the Australian Taxation Office (ATO) can be a David vs Goliath struggle. Fees also rack-up in various situations, such as relationship breakdowns, starting a small business, termination of employment and where complex tax calculations are required.’

In supporting the proposed changes, the Australian Institute noted that the average deduction for managing tax affairs is under $3,000 for most taxpayers. Only those earning over $250,000 had an average tax management bill of over $3,000. For example, the average tax management expense is $3,623 for people earning between $250,000 to $1 million per year and $12,657 for those earning over $1 million. People earning between $250,000 and $250,000 paid an average of $1,715 to manage their tax affairs.  

The proposed cap would only apply to the management of personal tax affairs. So paying a tax agent to complete your Business Activity Statements or accounting for company tax obligations would not be capped under the proposal. Unless you have major issues or complications with your personal tax affairs, you probably won’t reach the proposed deduction limit.

There could be an issue in cases where the line between personal and business tax gets blurred. An article by CPA Australia noted that business owners could have an advice bill over $3,000. For example, a person who hasn’t filed in a few years could have a tax management bill larger than $3,000. In this and other cases, business owners might not get the advice they need because they were not able to deduct more than $3,000.

The proposed changes could apply to managing tax affairs related to self-managed super funds (SMSFs). According to IPA CEO Andrew Conway, the proposed measure could restrict the taxpayer’s ability to get the best possible support from a tax agent or specialist. Clients seeking SMSF advice could ask tax agents to limit services at the $3,000 cap and not get the help they need.