The Rationale for a Flat Income Tax Deduction

Did you know that you can claim a tax deduction for every hour you work from home? The ATO allows a flat reduction of 67 cents per hour worked, intended to cover “additional running expenses” in your home.

Or did you know that you can’t claim expenses for travelling to work, but you can claim expenses when that work involves “professional development”? Did you know that life insurance isn’t tax deductible, but income protection insurance is?

If you aren’t on top of such intricacies, you may be pleased to know that the ALP is bringing a flat tax deduction policy to the federal election. 

If the ALP is re-elected, from the 2026-2027 financial year Australian taxpayers will be able to declare an automatic $1,000 tax deduction. All employee taxpayers who pay at least $1,000 in income tax will be eligible to claim $1,000 back without receipts. Claiming more than $1,000 will still be possible.

“It means more than one in three taxpayers will only need to make six clicks to tick their tax return,” said the ALP in a statement on Sunday.

Labor says it also means tax relief for the 5.7 million taxpayers (39% of total) who currently claim back less than $1,000. It is meant to “cut red tape” and “save on the cost of professional tax advice”. 

The flat tax deduction idea was most prominently proposed by Blueprint Institute in 2021. Blueprint Institute describes itself as “socially progressive and economically conservative”.

The Institute suggested the policy could either reduce the cost of running the ATO or fund increased compliance. The ATO’s random audits have found that 80% of audited tax returns require amendments; yet it is only able to demand amendments to 2-3% of all tax returns. And this is with a department budget of $3.8 billion and over 18,000 staff.

Blueprint advocated a $3,000 flat tax deduction, saying it would eliminate 7 to 9 million tax returns and $750 million in legal and accountant fees. Currently, around 70% of Australian taxpayers file their taxes through an accountant, versus just 18% of taxpayers in Belgium and 24% in Spain.

Indeed, consumer accountants are likely to make up the majority of those who won’t welcome Sunday’s policy promise.