Labor plans crackdown on deductions for travel to tax havens

Australians who are claiming tax deductions for travelling overseas to tax havens will find it much harder to do so under a future Labor government.

Under the proposed changes, Labor says it will automatically deny deductions for travel to a jurisdiction on a tax haven “blacklist,” forcing individuals to make a request to the tax commissioner if they still want to claim the travel deduction.

It means the current self-assessment system, which works on good faith, will be overhauled – with the onus of proof reversed – so individuals will have to open up their books for the Australian Tax Office (ATO) to prove that they were travelling to a tax haven, like the Cayman Islands, for legitimate purposes.

An individual, business or legal identity will be able to apply to the tax commissioner for a travel deduction with complete substantiation of all costs, and justification that such costs were incurred in the production of assessable income.

Labor believes roughly 25% of current deductions associated with travel to tax havens would be denied under the proposal, because they wouldn’t fully comply with the ATO’s requirements or could not be substantiated.

Labor says the measure will raise an extra $22m in revenue over four years. Its proposed blacklist of tax havens, based on a draft EU blacklist, includes: Andorra, Liechtenstein, Guernsey, Monaco, Mauritius, Liberia, Seychelles, Brunei, Maldives, Cook Islands, Nauru, Niue, Marshall Islands, Vanuatu, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Montserrat, Panama, St Vincent and the Grenadines, St Kitts and Nevis, Turks and Caicos and the US Virgin Islands.

Labor also promises to revive a measure from its 2012-13 budget that never saw the light of day.

As part of its crackdown on tax avoidance, a future Labor government will deny a tax deduction for a bad debt written off, where the debtor is a related party not in the same tax consolidated group.

That means irrespective of how a business structures itself for tax purposes, it will not be able to get a tax benefit for writing off a bad debt from a related party.

Labor estimates the measure will raise roughly $20m in extra revenue over four years.

The two measures will add to a suite of policies targeting multinational tax avoidance and high wealth tax dodgers, saving the budget $4.8bn over the next decade.

Measures already announced include capping deductions for managing tax affairs at $3,000, cracking down on “citizenship shopping” by requiring all Australian taxpayers to notify and declare to the ATO if they have residency or citizenship of any other jurisdiction and the name of that jurisdiction, and introducing mandatory shareholder reporting of tax haven exposure, requiring companies to disclose to shareholders as a material tax risk if the company is doing business in a tax haven.

The shadow assistant treasurer, Andrew Leigh, said Labor knew what had to be done to tackle multinational tax avoidance.

“Today’s announcement builds on our existing policies, which would collectively save the budget $4.8bn over the next decade,” he said.

“The money being bled away to tax havens is not a trickle. It’s a flood and the Coalition needs to act before more cash is drained from Australia’s tax system.”