Juggling Tax
The Gravity of Compliance

by Yvette Aubusson-Foley

Perhaps now the Federal Government has slashed thousands of redundant taxation laws from the former bedside-read of 9,000 pages, the regional business owner can lose less sleep worrying about how they will comply.

Despite this sudden, pre-Federal Budget makeover; some ‘part-of-the-way’ Budget reforms and Australian Tax Office marketing banter about how easy it’s become, why is there still so much red tape and a queue of industry groups complaining about compliance? Even tax agents scratch their expert heads troubled by the complex system.

Resource-poor small to medium enterprises (SMEs) find the juggling act of working their business taxing enough and they struggle and fail to keep the tax compliance balls in the air.

Small Business and Tourism Minister, Fran Bailey recently addressed the SME Growth Summit and said: “The red tape anchor drags many small businesses down. What we want to do is slash that anchor and free up small businesses from the day-to-day drudgery of government forms and red tape.”

The resounding view is that compliance cost stunt economic development and growth. Take for example a Council of Small Business Organisations of Australia spokesperson that is quoted in the Taskforce on Reducing Regulatory Burdens on Business, ‘Rethinking Regulation’ Report, January 2006: “[S]mall businesses are feeling swamped by the procedures they face just to exist and this is not just directly with government. Indirect red tape is also playing havoc with the little time available to small business owners and their staff.”

”Government reports are three per month, two per quarter, three annual ones. We computerised to make this reporting process easier, but have found the daily updating of the computer just as time consuming. The additional impost of constant changes to government laws, e.g., food safety, flammable goods, superannuation, taxation and now industrial relations requires continual education of self as well as staff. It’s hard to run a small business as well as try to keep abreast of these changes,” says another retailer from the National Association of Retail Grocers of Australia.”

It’s a spokesperson from Starkis Design who sums up the current mood: “Think ‘Business Activity Statement Instructions’ … which weighed in at over 150 A4 pages. 150 pages worth of instructions to fill in a single form? And that was supposed to be a simplification of the tax system! … If the compliance legislation is too complex to explain in a small concise document, then it is too complex to expect business owners to consistently comply with it.”

With this level of discontent prevalent in the business community, the findings of the Institute of Chartered Accountants (ICA) survey of small to medium sized enterprises (SMEs), released on Budget Eve, are hardly surprising. While SMEs are optimistic about their economic future, they view taxation red tape in the same light as death by strangulation.
The 2006 National SME survey showed a convincing 95 per cent of all 802 respondents “called for action against the litany of legislative red tape strangling SMEs.” Seven hundred and fifty respondents judged the complexity of current taxation legislation as the issue most in need of reform.

Ninety-one per cent of tax practitioners surveyed said the volume and frequency of change in the Federal taxation system needed reform and 87 per cent said compliance costs were concerning (up 6 per cent from 2005).

“These repeated frustrations expressed by small businesses, year after year, over Federal tax legislation sends a clear message to the government: reduce red tape,” said the Institute of Chartered Accountants SME Chairwoman, Sue Prestney.

The 400,000 SMEs in New South Wales, and colleagues south of the border, know what these frustrating circumstances do to profits. “The bottom line is the bottom line. [Complying with tax legislation] affects all businesses’ bank accounts and time, and does certainly hinder some businesses developing to their full potential because they are too concerned with complying with the rules rather than concentrating on their business performance,” said Marc Lidgerwood, Partner, Stewart, Tracy & Mylon Accountants, Wodonga, Victoria.

Businesses living on the NSW Victorian border also have what is locally referred to as ‘Cross-Border Issues’. These involve such items as Workers Compensation, Land Tax, Payroll Tax, Stamp Duties, and various licensing issues in many industries.

“These costs in our local area (and also for businesses dealing interstate) are definitely made worse by the fact of two state jurisdictions whereby you may have to comply with two sets of rules, simply for having the Murray River divide us. As if one set of rules was too much, try two!” he said.

The Simplified Tax System hasn’t helped. “The Simplified Tax System was introduced to reduce compliance, but all it really provides is yet another way to record your information and get some short term tax savings. It just provides another option for the businesses accountants to calculate the client’s tax bill – there’s not really any savings. We feel in general that the recently presented reforms merely present more options and thus more time and money for business owners to comply,” said Lidgerwood.

“We feel that the people writing the legislation do not understand the physical implications to the business owner, of what they are legislating for. Then the enforcement of those rules by the various government departments seems to be duplicated in many instances and we don’t have a centralised point of reference to handle all of it,” he said.

“As far as Income Tax and GST enforcement is concerned, penalties applied by the ATO at the moment are a very big issue. Business owners are now tax collectors for the government, and it’s costing them a lot of time and funds to ensure they are complying. They’re being penalised financially for collecting the taxes for the government – there’s something not quite right about that to us,” he said.

That’s not to say the ATO hasn’t implemented effective moves to ease compliance costs. Theirs is an enormous task managing a multitude of individual and business taxation requirements across a plethora of industries – and keep it fair.

We’ll come back to fair. For now, the ATO are making the right noises to ameliorate the impact of the compliance burden on small businesses. These include changes to the BAS system, improved consultation on new tax laws and the introduction of a broad range of electronic services. But are they doing enough?

“The Australian Tax office has tried a number of strategies to lower compliance costs for regional businesses. One of the main ways is to implement an e-tax system for submitting returns and online tax payments,” said Ann Latimer, Tax Writer for LexisNexis, a leading provider of Australian news, business and legal information products.

‘It has also provided free record-keeping software for businesses to enable better tax transparency reporting. There is also the Computer Assisted Verification program for auditing of computer records,” she explained.

The online Business Portal has seen a growth with 90,000 registered users listed. More than 1 million individual taxpayers used the e-tax product to lodge their 2003-04 income tax returns. But ATO’s research shows that between April 2004 and May 2005 over 90 per cent of tax agents agree the revenue system is easier to deal with but 50 per cent don’t believe the administration is becoming less complex.

“You have to deal with federal bodies such as the ATO, Centrelink and ASIC, and numerous state-based government departments, yet it seems there is little sharing of systems between them all. This impedes both the small operator as well as the large enterprises,” said Lidgerwood.

Is that, however, just the way it is? “The very nature of tax laws and the complexities involved do not allow for an inexpensive strategy to be implemented, whether because too much paperwork is required or whether it is because of unintentional misunderstandings arising between the ATO officer or the company officer in question,” said Ann Latimer.

“Take for example, GST and compliance – it has always been known prior to the implementation of the GST in Australia that the compliance factor for small businesses is of a much bigger issue than that for large multinationals and such small businesses are the lifeblood of regional centres,” she said.

If there can be a benefit of all of the GST compliance, is that it is now forcing businesses to keep their figures up to date and therefore we’re sure that the proprietors are in a much better position than before to make managerial decisions.”

There is however an increasing risk of the penalties even for innocent non-compliance. “In order for the government to cover all loopholes and stop the small percentage of businesses out to rort the system, the legislation and rules just keep growing,” said Lidgerwood.
Michael Carmody Commissioner of Taxation wrote in his forward to the ATO 2005/06 Compliance Program Report that: “By detailing the compliance risks as we see them, and what we are doing to address them, we send a clear message to the community on how to avoid the risks associated with non-compliance.”

“Small business debt continues to be an issue and while we don’t want to send viable businesses to the wall, out of fairness to others who meet their tax responsibilities on time, we will be taking firm action against those who fail to work with us to pay their tax debts,” he said.

Ann Latimer explained: “I don’t believe that the ATO is cracking down on companies more than ever now as compared to before. It is just that the ATO is becoming more efficient in its strategy for identifying non-compliance in businesses.

“Further, tax laws have now become so complex and far reaching that the possibility of breaching a particular provision of legislation will be very likely should the business attempt to deal in a way not contemplated by the laws.

“To monitor non-compliance, the ATO has a risk profiling system which uses a number of ways to identify the risk of non-compliance of tax obligations in businesses. These techniques include data matching processes, reviews and audits and domestic as well as international information gathering from banks and other financial institutions overseas,” she said.

“Such techniques enable the ATO to quickly identify businesses that are non-compliant and will result in the ATO taking further action, including conducting compulsory interviews and production of documents. These actions incur a great deal of costs to businesses and will result in additional administrative penalties being imposed on the business in relation to any failure to comply.”

And now to the question of fairness. For most there’s no question, you do the right thing and pay your taxes, no matter how complex or expensive – for the greater good. But the Taskforce on Reducing Regulatory Burdens on Business found: “the complexity of regulation, and threat of penalties for even inadvertent non-compliance, can be disheartening and a source of considerable stress for some small business people.”

Not so Adelaide businessman Robert Gerard who was under investigation by ATO for 14 years and found to be involved in tax evasion settled his misgivings out of court to the tune of $150M. Gerard held an eye-brow raising Cabinet-appointed seat on the Reserve Bank of Australia at the time.

At the ‘lower’ end of the spectrum in 2004 a Marrochydore District Court sentenced a 36-year old mother of three to three years jail for submitting false activity statements, which amounted to a fraud of $85,000. Both the mother and Gerard were found to be deliberately evading tax – only one served jail time. Cases like these do undermine the faith and confidence the ATO expects.

“Our aim is to deter evasion and serious fraud before it occurs … by publicising that any person contemplating committing a fraud or evasion stands a good chance of being identified, convicted and imprisoned for a lengthy period,” says the Compliance program report.

The ATO’s agenda is of course to recoup tax in full. Since July 2004, nearly 100,000 payment arrangements have been entered into, which represents $846 million in outstanding debt. This is in addition to taxpayers who have paid in full, with payments of $620 million received to date.
That’s big ‘bikkies’ in the national tin, but at the opposite end of the tax compliance spectrum is the massive cost to the economy. The expense Governments incur in designing, implementing, enforcing, reviewing and updating regulation are outlined in the Regulation Taskforce’s ‘Rethinking Regulation’ report.

“The administrative expenses of 15 dedicated Australian Government regulatory agencies approached $2 billion in 2003–04. The Australian Taxation Office accounted for a further $2.3 billion in that year,” the report said.

“Where regulation increases business costs, these are often passed on to consumers in the form of higher prices for goods and services. Some regulations may also unnecessarily restrict consumer choice.

“Further, regulation that increases business costs or restricts business opportunities may jeopardise not only the profits of owners, but also the job security and wages of their workers. Where unemployment results, tax receipts fall, and welfare expenditure rises,” said the report.

While the debate continues to rage on the effects of taxation compliance, the cold hard fact is this, the tax laws are not going away and taxes must be paid.

“Business owners need to understand that it is part and parcel of undertaking an enterprise – you just have to commit and budget the time and dollar resources as part of the everyday tasks,” concluded Lidgerwood.

“There’s always some lobby or industry group putting their hand up for small businesses, and I think they all have some clout, but we really feel there needs to be better co-ordination amongst all government departments so there is no overlapping and double-handling,” he said.

“All rules and legislation both protect businesses, and hinder them, so we don’t think it very easy to find the right solution. As for the Cross-Border issues, all of the various State legislation needs to be agreed upon and aligned – it’s the only solution.”

The taxation compliance issue has a long journey ahead. It is an emotive topic that heralds reforam. Ann Latimer of LexisNexis suggests however that there is no indication the ATO is likely to implement major reforms any time soon. “If you are talking about ATO policy and guidelines for tax compliance in relation to regional businesses, then I don’t believe so,” she said.

As the Institute of Chartered Accountants SME Chairwoman, Sue Prestney suggested: “Our current tax legislation is not written for the 96 per cent of Australian businesses that are SMEs. It is designed for the big end of town. And until that changes, tax legislation will continue to impose onerous compliance costs for small businesses.”

Despite the bitterness of that pill to swallow, there are numerous lobby groups rolling up their sleeve as you read this article, ready to push the barrow on reducing the burden of tax compliance.

What The Budget Got Right

The Australian Government will:

• increase in the minor fringe benefits exemption threshold from $100 to $300 (effective 1 April 2007)

• increase the fringe benefits reporting exclusion threshold from $1,000 to $2,000 (effective 1 April 2007)

• Provide $29.6 million to 2008-09 so that Government forms can be electronically signed and verified when lodged through www.business.gov.au. This is in addition to the $27.4 million provided over the next three years for www.business.gov.au; and enhance the Business Cost Calculator at a cost of $1.1 million over two years to better assess the compliance costs on business.

• The $50 million Regulation Reduction Incentive Fund will continue to reduce red tape and save compliance costs for small business.

More information can be found at: www.business.gov.au