Business Daily Media

Does paying for tax advice save money? Only if you’re wealthy

  • Written by Youngdeok Lim, Senior Lecturer, Accounting, UNSW Sydney
Does paying for tax advice save money? Only if you’re wealthy

If you use a tax adviser to complete your income tax return you’re not alone. Australians use tax advisers more than any other nation apart from Italy[1].

It’s easier, less stressful, gives you confidence the job is being done right and saves time.

But does it save you money? Our research says no – unless you’re one of Australia’s wealthiest individuals.

Read more: How global tax dodging costs lives: new research shows a direct link to increased death rates[2]

If you’re a typical wage earner, paying a tax adviser is likely to increase your final tax liabilities, even after you claim a tax deduction for the adviser’s fees.

In fact, after analysing 5 million individual tax returns over a four-year period, we’ve found tax advisers are more likely to act as “tax exploiters” for wealthy clients but “tax enforcers” for the rest of us.

For clients with annual taxable income more than A$180,000, whose financial affairs make tax rules complex or uncertain, tax advisers can help identify ways to save money. But for everyday wage earners they mostly ensure compliance with the tax rules.

Greater benefit for the wealthy

Our research is the first to explore this topic using the Australian Taxation Office’s ALife dataset[3]. This comprises a randomly selected (and anonymised) sample of 10% of all Australian taxpayers (about 1.4 million observations each year).

Analysing this data shows professional tax advice is very useful for the very wealthy to reduce their tax liabilities. Plus they get a tax deduction on paying for that advice.

alt text
Tax advisers save time and stress for ordinary wage earners, but not money. Shutterstock

Those on the highest levels of supplementary income – that is, business income, rental income, personal services income and income from partnerships and trusts – undertake more aggressive tax avoidance than individuals on lower incomes.

The more spent on tax professional services – and thus the higher the deduction – the more likely aggressive tax-avoiding behaviour.

Read more: Explainer: the difference between tax avoidance and evasion[4]

In effect, the tax deduction disproportionally helps the wealthy minimise their tax.

Should the deduction remain?

This raises an important question. Should the tax system provide generous tax deductions that only really benefit wealthy taxpayers in their efforts to pay as little tax as possible?

One solution would be do away with such tax deductibility altogether.

We propose, instead, a $3,000 cap on the amount that can be deducted for paying tax advisers. Currently there is no limit.

The Labor Party proposed such a reform[5] in 2017, under Anthony Albanese’s predecessor Bill Shorten.

The Australia Institute supported this with research[6] showing only those with incomes higher than $500,000 were likely to be affected by the $3,000 cap. The average (mean) deduction for tax advice was $378, and the median deduction just $165.

Prior to the 2019 election the Parliamentary Budget Office estimated the cap[7] would save about $120 million a year, rising to $130 million a year in 2022-23. After Shorten’s election loss, however, the policy was dropped.

Maintaining integrity

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[8] indicates tax advisers may look to get around the deductions cap by shifting the expense to other line items in an income tax return.

For example, instead of claiming tax advisory fees on a wealthy taxpayer’s personal tax return, they might allocate the fees to a related entity, such as a trust or company controlled by that individual.

But this is not an insurmountable issue. There are ways to prevent such manipulation through so-called “ring-fencing” rules.

Nothing needs to change for those of us who use a tax adviser for the convenience and certainty.

References

  1. ^ apart from Italy (www.aph.gov.au)
  2. ^ How global tax dodging costs lives: new research shows a direct link to increased death rates (theconversation.com)
  3. ^ ALife dataset (alife-research.app)
  4. ^ Explainer: the difference between tax avoidance and evasion (theconversation.com)
  5. ^ proposed such a reform (australiainstitute.org.au)
  6. ^ with research (australiainstitute.org.au)
  7. ^ estimated the cap (www.aph.gov.au)
  8. ^ previous research (theconversation.com)

Authors: Youngdeok Lim, Senior Lecturer, Accounting, UNSW Sydney

Read more https://theconversation.com/does-paying-for-tax-advice-save-money-only-if-youre-wealthy-184641

Business Reports

How to destroy a ‘forever chemical’ – scientists are discovering ways to eliminate PFAS, but this growing global health problem isn’t going away soon

How long do we really need chemicals to last?Sura Nualpradid/EyeEm via Getty ImagesPFAS chemicals seemed like a good idea at first. As Teflon, they made pots easier to clean starting in the 1940s. They made jackets waterproof and ...

Will the Inflation Reduction Act actually reduce inflation? How will the corporate minimum tax work? An economist has answers

Don't expect the Inflation Reduction Act to bring down prices all that much.AP Photo/David ZalubowskiThe U.S. is about to spend US$490 billion over 10 years on reducing greenhouse gas emissions, improving health care and reducing ...

Is Maintaining Good Customer Service Difficult?

Good service is the key to success within any customer-facing business. Employees should strive to help in a clear and friendly way, to attract new customers and retain current clients. There are many ways in which you can imple...

Business welcomes Safeguard consultations

A comprehensive consultation process on the Safeguard Mechanism will be critical to achieving our targets and locking in a stronger economy, Business Council chief executive Jennifer Westacott said. “It’s time to move beyon...

Adyen advances in-person payments with the launch of in-house designed terminal range

Adyen (AMS: ADYEN), the global financial technology platform of choice for leading businesses, is pleased to announce the launch of its first in-house designed terminals. Innovated to facilitate diverse payment use cases, the ...

Water education is key to creating sustainable communities

Water has shaped the unique landscape and the culture of the Northern Territory for over 60,000 years and is just as important today. Water is at the centre of the Territory lifestyle. In remote communities, preserving water hel...

Web Busters - Break into local search

WebBusters.com.au