In the Australian Income Tax system, individual taxpayers are entitled to claim deductions for expenses incurred while earning salary and wage income. These deductions are called work related expenses. According to Taxation Statistics, work related expense deductions grew by 15 per cent from 2010-11 to 2015 16. In 2015-16, 8.6 million taxpayers claimed nearly $22 billion in work related expense deductions.
There is evidence that claims for work-related expense deductions can be erroneous and there is a propensity to over claim, including in returns prepared by tax agents. In his National Press Club address on 5 July 2017, the Commissioner of Taxation expressed concern about the accuracy of work-related expense claims related to work, clothing and vehicles in the 2014-15 financial year. While individual amounts overclaimed can be small, the sum and overall revenue impact is significant. The Commissioner estimated the overall revenue impact was in the vicinity of $2.5 billion.
Research by H&R Block in 2016 indicated one in five taxpayers believed misrepresentation of tax return information isn’t so bad, and 71 per cent believed they could claim something they were not entitled to (Lonergan Research 2016). PhD research (Wurth 2013) found tax agents rated their clients’ work-related expense claims as the ‘least compliant’ label on the tax return. Behavioural insights offers a low-cost tool to address these behaviours and underlying attitudes and help taxpayers willingly comply with the tax system.
The Behavioural Economics Team of the Australian Government (BETA) partnered with the Australian Taxation Office (ATO) to examine the extent to which behaviourally-informed communications to tax agents could reduce erroneous work related expense claims. In particular, we tested the effectiveness of a letter sent to tax agents drawing on behavioural insights to address social norms.
We used a randomised controlled trial to test the impact of sending this letter to tax agents whose clients had higher than expected work-related expense claims compared to their peers. The letter specifically identified each agent’s clients who had lodged higher than expected claims (referred to as ‘identified clients’). There were over 2,000 tax agents in the trial, who were randomly assigned to a letter group or a ‘no letter’ control group.
17 per cent of agents in the letter group lodged amendments, compared with 1 per cent of agents in the ‘no letter’ group. On average, identified clients represented by agents in the letter group reduced their work related expense claims by $191, compared with a $2 increase in the ‘no letter’ group. Overall, identified clients reduced their work-related expense claims by a total of $2.2 million. If we had sent the letter to all agents in the trial, including those who did not receive a letter, we expect this simple messaging intervention would have decreased work related expense deductions by about $4.4 million.
The letter led to an increase in the average total tax paid per client of $76, for a total of $0.9 million. If we had sent the letter to all agents in the trial, total tax revenue would have increased by an estimated $1.7 million. We cannot be sure about the contribution of the reduction in work-related expense claims to the increase in tax paid, because amendments to tax return labels other than work-related expenses could have influenced the net tax position.
Overall, these findings indicate low-cost, well-targeted and well-designed communications incorporating behavioural insights are effective in reducing erroneous work-related expense claims although the length of time for which this behavioural change is sustained remains unknown.