Tax Compliance Costs for the Small and Medium Enterprise Business Sector: Recent Evidence from Australia

Tax Administration Research Centre (TARC)

Speaker:Chris Evans, University of New South Wales, Australia and International Fellow of TARC
Date: Thursday 26 September 2013
Time: 16:00
Location: Matrix Lecture theatre, Building One

Further details

The burden imposed by taxation systems on business taxpayers, in particular on small and medium business taxpayers, has been a much debated topic in many academic and practitioner forums.  That burden typically consists of three elements.  In the first place there are the taxes themselves, whether they are taxes on the profits, the products or the employees.  Secondly, there are the efficiency costs (variously referred to as deadweight losses or excess burden), involving tax-induced market distortions.  And finally there are the operating costs of the tax system: the costs to the government (ultimately borne by taxpayers) of administering and collecting the taxes (usually referred to as administrative costs), and the costs incurred by taxpayers in complying (or sometimes not complying) with their tax obligations (usually referred to as tax compliance costs).

This paper is solely concerned with the latter burden: tax compliance costs.  Previous research into tax compliance costs has provided ample evidence that they are significant for Small and Medium Enterprises (SMEs) in most Organisation for Economic Cooperation and Development (OECD) tax jurisdictions.  They are particularly high in absolute terms and relative to the size of the business, whether measured by reference to turnover, income, number of employees or any other proxy.  The research also shows that those compliance costs do not appear to be diminishing over time.  

 This paper presents the preliminary outcomes of a large-scale survey recently conducted in Australia that investigated the tax compliance costs from all taxes (federal and state/territory) for Australian business taxpayers (and particularly the SME business sector).  The study was part of a broader project designed to assess and address tax system complexity, and was complemented by surveys identifying the compliance burden of Australian non-business taxpayers and of large and international business taxpayers (separately reported). 

 Analysis of the survey results suggest that the average gross tax compliance costs for the SME business sector have continued to increase, in constant dollar terms, in recent years, despite significant efforts by the Australian Taxation Office to reduce the burden.  While a small decrease in internal tax compliance hours may have occurred since the last major studies undertaken, the average amount spent on external services more than doubled.  It also establishes that the compliance burden measured as a proportion of turnover was much more significant for micro-businesses than for small businesses or medium entities.  Confirming other recent findings, the Australian value added tax (the GST) led all other tax obligations in terms of compliance time.  Another key outcome of this study was the clear perception among respondents that the complexity of tax laws, the frequency of tax changes and the administrative requirements imposed by the ATO were significant drivers of tax compliance costs for their business.  This perception was particularly strong among medium sized entities, as was the opinion that compliance with obligations imposed by state/territory taxes (for example payroll tax) was especially costly.

 The research will have implications for academics, tax policy-makers and administrators, as well as for practitioners in the SME and related sectors.