To Cap or Not to Cap? Policy Options for Dealing With the Costs of Managing Tax Affairs Deduction in Australia

In the lead-up to the 2019 Federal Election the Australian Labor Party proposed, inter alia, to cap the cost of managing tax affairs deduction at $3,000. While there was much commentary in relation to this particular deduction from politicians and even more backlash from practitioners on the proposed capping of this deduction, there remains a dearth of academic research in this area – both in the Australian context and abroad. This article explores and extends the literature on the use and value of the cost of managing tax affairs deduction, and the usage and benefits of tax advisory services more broadly, with a focus on the under-explored High Wealth Individuals (HWIs) segment, by providing the perspective gleaned from a survey of senior tax professionals in Australia. It finds that a cap on the cost of managing tax affairs deduction would be unlikely to yield its intended policy outcome, in part due to the interchangeability in practice between advisors’ use of personal income tax deductions and corporate income tax deductions for some client segments, including HWIs. It further finds that capping the cost of managing tax affairs deduction would likely have an undesirable effect compared to what was originally intended. Overall, this research presents evidence-based and practitioner-led policy recommendations for reform of the cost of managing tax affairs deduction.