Micro businesses ‘overwhelmed’ with tax debts, lodgements
Thousands of micro businesses are dealing with significant tax debts and are well behind on lodgements, UNSW research reveals.
Over a third of micro business clients at the UNSW Tax and Business Advisory Clinic are reporting high levels of financial stress, with many struggling with lodgement obligations and significant tax debts.
The UNSW Tax and Business Advisory Clinic, which provides free tax and businesses advice and education, found that over a third of our micro business clients rate their financial distress levels as a 10 out of 10.
The UNSW Business School estimates there are millions of small or micro businesses that are “crashing in and out of the system” every year.
“One of the primary challenges faced by micro businesses is the lack of knowledge and expertise in completing their tax returns and business of activity (BAS) statements,” said Michael Walpole, co-founder and professor at the School of Accounting, Auditing and Taxation, UNSW Business School.
“Very often, micro businesses will not have saved enough money to pay the tax.”
Without proper guidance or knowledge, micro business owners may find themselves teetering on the brink of bankruptcy.
“Many micro businesses have multiple years of un-lodged BAS, with some even dating back to the year 2000, which has seen their ATO penalties and financial obligations snowball. The average micro business helped by the clinic has racked up eight years of overdue tax returns,” said Professor Walpole.
“For the most part, people have not gotten into this situation through bravado or recklessness. They’ve got into this situation through misunderstanding, and of course, they pay the most imminent bill.”
Micro businesses can fail to understand compliance obligations in a variety of scenarios.
“A common reason is that someone takes on contract work due to personal circumstances as a sole trader using an ABN but doesn’t know where to start in terms of their tax obligations,” said Paul Viola, lecturer in the School of Accounting, Auditing and Taxation at UNSW Business School.
Other scenarios are often seen in family business arrangements, where there have been relationship breakdowns.
“Usually, one partner has more interest in the business or more of an understanding of the day-to-day operations and financial obligations,” said Mr Viola.
“Some business owners are in a situation where they're experiencing domestic violence or have experienced it. Many of these victim's experience difficulties gaining control over their finances after the fallout because they don’t have access to records or feel uncomfortable requesting them from their former partner.”
Mr Viola said some business owners are in a situation where they’re experiencing domestic violence or have experienced it.
“Many of these victims experience difficulties gaining control over their finances after the fallout because they don’t have access to records or feel uncomfortable requesting them from their former partner,” he said.
More than half of the female clients seen by the clinic have experienced domestic violence.
“As a result, tax problems are an unexpected consequence once barriers between former couples emerge,” he stated.
Micro businesses can usually afford to pay an accountant when the business is established but if it starts to struggle can no longer afford the cost.
This leaves them with financial reporting obligations but no understanding of how to meet them.
“Taxpayers continue what they do and don’t recognise their tax obligations. You wouldn’t say this was a case of ignorance, but it’s more a case of just not knowing how or wanting to deal with it.”
About the author
