The Small Business Sector
|FINDINGS OF BOARD OF TAXATION SCOPING STUDY ON SMALL BUSINESS TAX COMPLIANCE COSTS|
The vast majority of Australian businesses are small businesses. Around 93 per cent of all Australian businesses by number have turnover of less than $2 million per year.
Small businesses are very important to the Australian economy. They produce around 39 per cent of Australia’s industry value added and employ almost half the non agricultural workforce. Most are engaged in the property and business services, agriculture, construction and retail sectors.
While not for profit organisations are not generally established for business purposes, in some respects they may experience similar compliance issues to small businesses.
Compliance costs have a more significant impact on small businesses than on larger businesses. They are regressive, with a given cost imposing a proportionately higher impost, the smaller the business.
Governments, both in Australia and internationally, have recognised that small businesses have proportionately higher tax compliance costs and have introduced initiatives to try to reduce these costs.
Compliance costs can be both financial and non financial. In some cases, non financial compliance costs, such as stress and time lost, can be just as significant, if not more so, than the financial compliance costs. Many small businesses choose to replace stress and time costs with financial costs by paying tax agents and bookkeepers to assist in meeting their tax compliance obligations.
Small businesses may become confused about what tax compliance costs are. They do not always distinguish between tax compliance costs and either the amount of tax they have to pay or the general accounting and record keeping costs that are an essential part of running an effective business.
Tax compliance may provide benefits to businesses by imposing a discipline that allows them to better monitor and understand their business dealings and cash flow. Tax agents are often more likely to recognise these benefits than small businesses themselves.
The small business sector is extremely diverse and the compliance costs of small businesses are influenced by a range of factors. As a result, the experience of both tax and non tax compliance costs can vary significantly from business to business. For some businesses, tax compliance costs will dominate, but for others, non tax compliance costs will be more significant.
Size, turnover and business structure influence the compliance costs of small businesses. New businesses tend to start with low turnover and simple business structures, and generally have lower compliance costs. As the business becomes more successful over time and turnover grows, owners tend to move to more complex business structures, for example companies and trusts, to minimise risk and tax. This can increase both tax and non tax compliance costs.
Small businesses may not always be fully aware of the tax and non tax compliance cost implications of establishing their own business and changing from simple to more complex business structures such as a company and/or trust.
Employment of staff imposes significant regulatory compliance costs, many of which are not tax related.
Some business operators choose not to grow beyond a certain size so that they can avoid additional risk, complexity and administrative burdens.
Industry sector can influence both the level of compliance costs and whether tax or non tax compliance costs are more significant. Businesses that operate in the construction, restaurant and catering, agricultural and mining industries, in particular, appear to experience significant non tax regulatory compliance costs.
The skills, attitudes, efficiency and confidence of the small business proprietor are significant determinants of whether they are likely to be concerned about tax compliance obligations.
Businesses with computerised recording and reporting systems tend to manage their compliance costs better.
A significant number of small businesses outsource their tax compliance obligations, particularly to tax agents and bookkeepers. Key factors determining whether businesses outsource their tax compliance obligations include the size and complexity of the business, the cash flow, the proprietor’s understanding of their record keeping and reporting obligations, and the prioritisation of their time.
Some progress has been made in standardising the definition of ‘small business’ in tax law, but different definitions are still used in other parts of the law, making it difficult to define clearly the boundaries of the small business sector. There would be merit in exploring the broader application of a standard definition across all legislation.
Inconsistent definitions and thresholds for concepts such as ‘employee’ and ‘salary and wages’ cause complexity in the law and uncertainty for small businesses, potentially adding to their compliance costs.
Businesses that have to comply with regulations imposed by several jurisdictions because they operate across state and territory borders experience higher regulatory compliance costs than those that operate within one State or Territory. Trading across national borders is likely to increase compliance costs further, with nearly half of all Australian exporters being small businesses.
Use of the tax system to achieve social and other broader policy objectives can increase the complexity and pace of change of the law. This can influence perceptions of compliance costs and may in some cases increase actual compliance costs.
The provision of a range of choices, concessions and thresholds for small business in the tax system adds to complexity and encourages small businesses to seek professional advice, which increases their financial compliance costs.
Achieving both certainty and simplicity is a key challenge for all participants in the tax system. While taxpayers’ desire for certainty from the tax system is being met by the ATO offering to tax agents a range of public and private rulings, determinations, practice statements and other supporting materials, these can increase the overall complexity of the system.
Change to the tax system can increase compliance costs as both taxpayers and tax agents seek to understand new arrangements. However, change is also necessary to address concerns about compliance costs. Mandatory compliance cost assessments will assist in determining whether particular changes will increase or reduce compliance costs.
While individual changes may be justified, they need to be considered in the context of other changes that are being made. The cumulative impact of all changes on compliance costs also needs to be considered.
The complexity of the tax system and recruitment difficulties are placing significant pressure on the tax agent industry.
Consultation with small business is important to ensure that the design of tax policy, legislation, administrative systems and supporting materials suits the needs of small business.
Education of taxpayers and tax agents can assist in reducing tax compliance costs. There are roles for the ATO, the tax profession and other private sector organisations in providing education, and small businesses themselves need to seek out those services that best meet their needs.
There is no single, precise aspect of the tax system that appears to be driving the tax compliance concerns perceived by small businesses. Rather, changes to, and the accumulation of, regulation at all levels of government appear to be the problem. Consequently, there is no simple ‘quick fix’, and improvements are only likely to be achieved through concerted effort by governments across jurisdictions.
While concerns about completing Business Activity Statements appear to be gradually decreasing over time as businesses become familiar with the requirements, the BAS is still regarded as the most annoying and time consuming tax compliance requirement for small businesses. The degree of the concern varies from business to business. Ongoing education of small businesses about BAS requirements is likely to assist in easing the compliance burden.
While changes have been made recently to improve the operation of the small business capital gains tax concessions, the complexities of capital gains tax legislation still make it difficult for small businesses to comply easily.
While very few small businesses pay fringe benefits tax, some small businesses undertake considerable compliance activities in order to avoid being included in the FBT system.
Many small businesses are experiencing significant tax compliance costs in attempting to manage intergenerational transfer of business assets. The lack of a comprehensive regime across all levels of government to deal with succession planning issues appears to contribute to this cost.