Background
There are a range of factors that influence a taxpayer’s participation in the system. This includes how easy or difficult it is to participate and any cost for people to be compliant.
We know that people are more likely to comply when it’s easy for them to do so, and when they have confidence that others are complying too. For example, we are aware that the compliance behaviour of large corporate groups can affect community confidence in the system. This can then impact on the intentions of other taxpayers to participate and report details correctly in their individual tax returns.
For this reason, we take a system-wide view of participation. In collaboration with our stakeholders, we design products and services that make it easier for individuals to comply. We address impediments to the effectiveness of the system and work to ensure everyone pays the right amount of tax.
Paying your tax
Taxing particular arrangements or types of income differently, targeting concessions and government assistance payments, and the frequency of rule changes all contribute to the level of complexity in the tax system.
We aim to reduce complexity by providing tailored guidance and digital services to make it easy for people to get things right and hard not to. We also provide insights to the government and the Treasury on how the system is operating in practice and where we see opportunities for improving the design of the system at a policy, law and administration level.
The extent to which people not in business have complex affairs varies depending on their circumstances.
Personalised nature of allowable deductions
Despite advancements allowing the majority of people's income to be pre-filled into their tax returns automatically, the majority of individual taxpayers engage the services of registered tax agents to prepare their returns. This suggests that complexity associated with tax deductions is likely to be a factor for people continuing to use tax agents.
Individuals are entitled to claim deductions for work-related expenses if they meet each of these rules:
- they spent the money and were not reimbursed by their employer
- the expense was directly related to earning their income and was not for a private purpose
- they have a record such as a receipt, bank statement or diary entry to prove the amount being claimed or how it was calculated.
Types of expenses
Around 79% of individuals not in business claim some type of deduction in their tax return. The majority are for work-related expenses.
For most types of expenses, the person's personal circumstances and various rulings help taxpayers and agents determine whether the money was spent to earn income or for a private purpose. For example, money spent on:
- travel to and from work – is generally non-deductible, but travel from one workplace to another is deductible providing one of the workplaces isn’t the person's home
- meals at work – are generally non-deductible, but if a person is required to travel overnight for work, meal expenses may be deductible depending on whether
- the person received and spent a travel allowance
- the allowance was shown on their payment summary and declared as income in their tax return.
Thresholds and apportionment
Other factors that contribute to complexity include:
- applying asset threshold rules to decide whether to claim an immediate deduction for the total amount spent or a decline in value of the asset over time
- apportioning expenses that are both private and work-related in nature.
The Australian Bureau of Statistics (ABS) estimates that 23%Footnote2 of employees usually work from home. We know from our compliance activities that people often make mistakes when apportioning expenses associated with home offices and the use of electronic devices when claiming deductions for work-related expenses.
Employment arrangements
The ABS estimates that 6%Footnote3 of employees work in multiple jobs concurrently (at the same time). We know around 32%Footnote4 of people report salary or wages from more than one employer over the course of the financial year, in their tax return.
As employee terms and conditions can vary across employers, people who hold multiple jobs or change employers during the year may be able to claim a deduction for a work-related expense associated with earning income from one employer but not another. For example, car expenses for carrying bulky tools to and from work may only be claimed as a deduction if the employer requires those tools to be used for work, and does not provide secure storage to keep them at their workplace.
The rules for claiming deductions are also different for employees and independent contractors. There are special rules for people who earn personal services income. Given this, the first challenge some people face is determining which rules apply to them. While it is difficult to estimate the number of people with this level of complexity, some researchersFootnote5 suggest one plausible future for Australia’s workforce is the growth of the peer-to-peer economy and freelancer staffing models. Should this future eventuate, there will be an increasing number of workers who need to determine their employment status to understand their entitlement to claim deductions and their other tax obligations.
Investment income
Around 13%Footnote6 of individuals report income from rental properties and some 18%Footnote7 report income from dividends. As these individuals have more complex tax affairs, they need to understand and comply with capital gains tax obligations, and keep additional records to substantiate investment income, deductions and capital gains tax events.
Interactions between systems
The personal tax affairs of individuals not in business tax affairs often involve interaction with other systems, including:
Tax and transfer systems
Individuals who interact with both the tax and transfer systems often find it difficult to understand their entitlements. As the government’s policy intent is to target benefits to people in specific circumstances, different definitions of ‘income’ are used to determine eligibility for different types of tax offsets and government assistance payments. Other factors that contribute to complexity include:
- income tax is assessed at an individual level but income tests for the private health insurance rebate and Medicare levy surcharge are applied on a family unit
- individuals who are eligible for the private health insurance rebate can choose to receive the rebate through a reduced health insurance premium or when they lodge their tax return
- some government assistance payments are exempt from tax and some types of income are non-assessable. It is still necessary to report these payments in tax returns as the information is used to determine some tax offsets and the Medicare levy surcharge.
Tax and superannuation systems
Some individuals have an obligation to pay additional tax on super contributions through the income tax system. We use data provided by super funds to determine these obligations. In some cases, there are timing differences between when we receive data from funds and when we finalise an individual’s tax return. As a result, some people are not aware of the obligation to pay additional tax on super contributions until they receive an amended income tax assessment from us.
Tax system and other government programs
For some individuals, lodging a tax return triggers an obligation to repay loans under the Higher Education Loan Program or provides a determination of income for child support payment purposes. For others, it determines eligibility for government assistance payments such as the child care benefit. These consequences can influence individuals' behaviour in terms of both lodging tax returns and correctly reporting income and deductions.
Cost of compliance
The Treasury has estimated the cost of compliance for all individual taxpayers (including those with business links) to be $7.3 billion a yearFootnote8. Most of these costs relate to record-keeping and external fees (primarily reflecting return-preparation fees paid to tax agents).
Individuals who are not in business claimed $1.2 billionFootnote9 for the cost of managing tax affairs in their 2017–18 returns. People are entitled to claim certain expenses associated with managing their tax affairs, including:
- fees paid to recognised tax advisers for providing tax advice or lodgment services
- the cost of obtaining a valuation for a deductible donation of property
- interest charges we may have imposed on them
- costs associated with appeals made to the Administrative Appeals Tribunal or courts.
Taxpayers can choose to use a registered tax agent to help them meet their tax obligations or deal directly with us to seek advice and prepare their tax return themselves. Most people who use a tax agent choose to do so for a variety of reasons including time, complexity and the peace of mind in having a professional managing their affairs.
Over the four years to 2016–17, the median deduction claimed for the cost of managing tax affairs increased by 7% from $150 in 2013–14 to $160 in 2016–17. This is in line with CPI growth of 5% for the same period.
|
Tax return label |
2013-14 |
2014-15 |
2015-16 |
2016-17 |
2017-18 |
|---|---|---|---|---|---|
|
Cost of managing tax affairs |
150 |
154 |
159 |
160 |
na |
|
Interest charged by the ATO |
na |
na |
na |
na |
133 |
|
Litigation costs |
na |
na |
na |
na |
150 |
|
Other expenses incurred |
na |
na |
na |
na |
165 |
Community beliefs, attitudes and social norms
The drivers behind people's behaviour in complying with the tax system are many and varied. They may include:
- the quality of service people receive
- complexity and costs of compliance
- the risk of getting caught
- the confidence they have in us and the extent to which they value the system
- social and cultural norms.
Understanding the value of the tax and superannuation systems and knowing how to participate in them is important. Research indicates we can influence lifelong attitudes of compliance by helping to educate tomorrow’s taxpayers. We provide teachers with an online resource – Tax, Super + You – and host webinars and visit schools to deliver face-to-face talks with secondary students across Australia.
We also have an ongoing focus on helping people new to Australia to understand the value of the tax and superannuation systems and to have a positive attitude about compliance.
Given the size and diverse nature of the individuals client segment, a key challenge for us is addressing the intangible influences on behaviour, like social and cultural norms. We understand there are commonly-held community perceptions and attitudes to tax that are influencing taxpayer behaviour. Things like:
- 'The big end of town doesn’t pay the right amount.'
- 'Everyone cheats a bit, so I can too – others won’t care.'
- 'I'm not hurting anyone.'
- 'When I lodge, I should get a refund.'
We are engaging with the community to promote the value of the tax and superannuation systems. We are challenging commonly held misperceptions and working to increase public trust and confidence in our administration of these systems. By publishing tax gaps where they are credible and reliable, we aim to contribute our perspective to the community debate.
See also:
- Tax and individuals – not in business
- Australian tax gaps – overview
- Tax and Corporate Australia
- Education zone – schools education program
- Footnote 2
- Australian Bureau of Statistics, Characteristics of Employment, Catalogue No. 6333.0 Australia, August 2018, Table 7
- Footnote 3
- Australian Bureau of Statistics, Working Time Arrangements Catalogue No. 6342.0, Australia, November 2012, Table 9
- Footnote 4
- Source: unpublished ATO tax return data
- Footnote 5
- Hajkowicz SA, Reeson A, Rudd L, Bratanova A, Hodgers L, Mason C, Boughen N (2016) Tomorrow’s Digitally Enabled Workforce: Megatrends and scenarios for jobs and employment in Australia over the coming twenty years. CSIRO, Brisbane, page 15
- Footnote 6
- Source: unpublished ATO tax return data
- Footnote 7
- Source: unpublished ATO tax return data
- Footnote 8
- The Treasury, Stocktake of Regulation Final Report, March 2015, page 20
- Footnote 9
- Source: unpublished ATO tax return data