Can Labor's $1,000 'instant tax deduction' actually reduce living expenses?

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It’s been billed as a time-saver designed to cut down on paperwork, reduce reliance on professional tax advice, and a vehicle for cost-of-living relief.

If re-elected, Labor will let Australians claim an instant $1,000 tax deduction to cover work expenses, something Prime Minister Anthony Albanese says will “provide more permanent cost of living relief and make tax time quicker and easier for 5.7 million taxpayers”.

But what do the experts think about Labor’s proposed tax change?

Low-income earners would benefit most

Mark Chapman, director of tax communications at H&R Block, says the proposal, which would come in from next year, would benefit lower-income earners the most.

“It does hit the sweet spot between offering cost of living relief, simplifying the tax system for those on very low incomes and retaining the basic right to claim deductions for those on higher incomes, or with more complexity,” he told SBS News.

“If you currently claim less than $1,000 in work-related expenses (for example, if you claim $100), you will be able to claim the full standard deduction of $1,000 – which is effectively a tax cut. This is bound to assist with cost of living pressures for low income earners — not by much, but every little bit helps.”

Not a ‘substantial’ cost of living relief measure

Dr Luke Hartigan from the University of Sydney’s School of Economics says the initiative will reduce paperwork, but doubts it will significantly help reduce the cost of living.

“I think this is a good initiative and will help reduce some of the paperwork related to tax deductions,” he told SBS News.

“Albanese’s claims that this will lead to cost of living relief is reasonable, but on its own, the policy is not really a substantial cost of living relief measure.”

Chapman said those on higher incomes or with more complicated tax returns wouldn’t see as much benefit.

“Higher-income taxpayers generally have a broader range of deductions which total more than $1,000. I’d say that this is targeted squarely at low and middle-income taxpayers (earning up to about $80,000),” he said.

“If you claim more than $1,000 in work-related expenses, you simply carry on claiming your deductions as you do at the moment.”

2021/22 data from the Australian Taxation Office shows the average work-related expenses deduction was $2,506.

Hartigan agrees that those who claim less at tax time will benefit, estimating $205 of relief.

“Around 5.7 million taxpayers who currently claim less than the $1,000 amount will benefit,” Hartigan said. “The average amount of annual tax relief for those who will benefit is estimated to be $205.”

“Anyone who is earning less than $135,000 in 2026/27 will benefit from this policy.”

Time is money, says consumer advocate

While the tax deduction may not solve the cost of living crisis, Sally Tindall from financial comparison site Canstar, says consumers may gain time back as they step away from an “overly complicated” tax system.

“The cost-of-living crisis has put plenty of family budgets under extreme pressure, however, many of these households are often under time pressures as well. Money might not be of abundance, but often time isn’t either,” she told SBS News.

“Millions of Australians may find they start claiming more on their tax returns, up to the $1,000 threshold, while others, who might have slightly more than a $1,000 in claimable expenses could decide to ditch the collecting and tallying up of receipts in favour of ticking a box.

“Life is too short to be chasing after receipts, particularly for those with minimal work-related expenses. This move will help millions of Australians submit their tax returns faster and more efficiently.”

Taxpayers urged to approach with caution

Other experts say that while the instant deduction could save people time, it might also mean taxpayers miss out on some much-needed funds.

“Taxpayers should be encouraged to take greater responsibility for their finances and tax obligations,” CPA Australia tax lead Jenny Wong told AAP.

“Clicking a few buttons to get a basic deduction may be easy, but it is unlikely to be in the best interests of taxpayers or the economy.”

While the initiative says taxpayers can claim their $1,000 without any receipts, Chapman urges Australians to still keep their receipts in case their work expenses turn out to be over $1,000.

‘Minimalist’ take on tax reform

Chapman says the initiative is a “minimalist” take on a policy spoken about off the back of the 2009 Henry tax review, which prompted calls for a $3,000 annual standard tax deduction.

“This idea has been talked about for a long time,” Chapman explained.

“This is very much a minimalist take on the policy — $1,000 is not a huge amount. I’ve seen figures as high as $3,000 suggested in other iterations of the policy in the past.”

Steven Hamilton is an economics professor at George Washington University in the US. He said Labor’s proposal would save the tax office and people money, in addition to moving to a system where no one has to itemise.

“The ATO has to spend a lot of money policing those deductions, and it’s just simpler for everybody,” he told AAP.

“It’s a great example of how making our tax system simpler and more straightforward can lift a big weight off of the economy.”

With additional reporting by Australian Associated Press.

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