A tax grab-bag from deductions to carbon sink forests

Several tax matters have caught my eye this week so my column is something of a tax grab-bag.

Standard tax deduction is gone

The Henry Tax Review proposal to give taxpayers a standard tax deduction for work-related expenses appears to be dead. The Treasurer announced in the 2010-11 federal budget in May 2011 that from July 1, 2012, the Federal Government would provide individuals with an optional standard deduction of $500 for work-related expenses and the cost of managing tax affairs. Although in its November 2011 MYEFO statement, the government deferred this to July 1, 2013, this year’s federal budget in May announced that it would not go ahead at all.

Now the Treasurer has indicated that the proposal would not be revisited. He said the government decided to raise the tax-free threshold and while it was “not a complete substitute” for the standard deduction, it was “a fundamental economic reform and tax reform in place that goes to workforce participation in particular”.

“We didn’t proceed then with the standard tax deduction but we’ve got another measure which simplifies the tax system dramatically, brings many people outside of the tax system and enhances work incentives.”

When asked if this would be reviewed, he said, “I can’t at this stage see it being revisited”.

PAYG instalments

The ATO adjusts the PAYG instalment amounts each year using a formula that takes into account the expected growth in the economy. This is known as the “Gross Domestic Product adjustment” (GDP adjustment) and is based on data published by the Australian Bureau of Statistics. The GDP adjustment method is available to individuals, multi-rate trustees, eligible small business entities as well as companies and certain super funds with $2 million or less of instalment income for the previous income year.

For the 2012-13 income year i.e. from July 1, 2012, the GDP adjustment used to work out taxpayers’ quarterly PAYG instalment amounts will be 6%.

The PAYG system (aka provisional tax to “more mature” practitioners) attempts to reflect a taxpayer’s expected tax liability for the current income year as accurately as possible. It’s not quite straight out guesswork, but there is a certain amount of educated crystal ball gazing involved, albeit with the use of ABS statistics.

The GDP adjustment is worked out using information from earlier years. The ATO says this means it may not match current economic conditions. When economic growth slows, the GDP adjustment may seem relatively high, while in conditions of sudden economic growth, the GDP adjustment may seem relatively low. That may be so, but 6% growth during 2012-13?

In its 2011 federal budget on May 10, 2011, the government announced it would reduce the GDP adjustment factor from 8% to 4% for instalments for the 2011-12 income year for taxpayers whose income year commences on or after April 1, 2011. This was later legislated. In the current economic circumstances, a similar 50% reduction for the 2012-13 year would have been welcome.

A taxpayer can, of course, seek to vary their instalment amount, but there are penalties if taxpayers vary their PAYG instalment amount down and end up paying less than 85% of the tax they should have paid on their business and investment income. Many might argue that the system is skewed the revenue’s way, with taxpayers having to do their own guesswork on how much they will earn in 2012-13, with the “stick” of a penalty hanging over them if they get it wrong.