If you’re hiring a tax advisor to complete your tax return, you’re not alone. Australians use tax advisers more than any other country except Italy.
It’s easier, less stressful, gives you confidence that the job is done right and saves you time.
But does it save you money? Our research says no – unless you are one of the richest people in Australia.
If you are a typical wage earner, paying a tax advisor will likely increase your ultimate tax liability, even after claiming a tax deduction for the advisor’s fees.
In fact, after analyzing 5 million individual tax returns over a four-year period, we found that tax advisors are more likely to act as “tax exploiters” for wealthy clients, but as “tax executors”. for the rest of us.
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For clients with annual taxable income over $180,000, whose financial affairs make tax rules complex or uncertain, tax advisors can help find ways to save money. But for ordinary employees, they mainly ensure compliance with tax rules.
More benefits for the wealthy
Our research is the first to explore this topic using the Australian Taxation Office’s ALife dataset. This is a randomly selected (and anonymised) sample of 10% of all Australian taxpayers (approximately 1.4 million observations each year).
Analysis of this data shows that professional tax advice is very useful for very wealthy people to reduce their tax debt. In addition, they benefit from a tax deduction on the payment of this advice.
Tax advisors save ordinary employees time and stress, but not money. Shutterstock
Those with the highest additional income – that is, business income, rental income, personal service income, and income from partnerships and trusts – practice more aggressive tax avoidance than low-income individuals.
The higher the expenditure on tax services – and therefore the higher the deduction – the more likely aggressive tax avoidance behavior is.
Indeed, the tax deduction disproportionately helps the wealthy to minimize their tax.
Should the deduction remain?
This raises an important question. Should the tax system provide generous tax deductions that really only benefit wealthy taxpayers in their efforts to pay as little tax as possible?
One solution would be to completely abolish this tax deductibility.
Instead, we are proposing a $3,000 cap on the amount that can be deducted for paying tax advisors. Currently, there is no limit.
The Labor Party proposed such a reform in 2017, under Anthony Albanese’s predecessor, Bill Shorten.
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The Australia Institute backed this up with research showing that only those with incomes above $500,000 were likely to be affected by the $3,000 cap. The mean (mean) deduction for tax advice was $378 and the median deduction was only $165.
Prior to the 2019 election, the Parliamentary Budget Officer estimated the cap would save about $120 million per year, rising to $130 million per year in 2022-23. After Shorten’s election defeat, however, the policy was dropped.
Of course, there is always a danger with such reforms that taxpayers and their advisers will look for ways around the new rules.
Our previous research indicates that tax advisors may seek to circumvent the deduction limit by moving expenses to other line items on a tax return.
For example, instead of claiming a tax advisory fee on a wealthy taxpayer’s personal tax return, they could allocate the fee to a related entity, such as a trust or corporation controlled by that person.
But this is not an insurmountable problem. There are ways to prevent such manipulation through so-called “closure” rules.
Nothing has to change for those of us who use a tax advisor for convenience and certainty.
Youngdeok Lim, Lecturer, Accounting, UNSW Sydney; Ann Kayis-Kumar, Associate Professor, UNSW Sydneyand Chris Evans, Professor, School of Taxation and Business Law, UNSW Sydney
This article is republished from The Conversation under a Creative Commons license. Read the original article.