Many Australians look forward to a tax refund at the end of the financial year, but for some microbusiness owners, the EOFY can be challenging. Why do some microbusinesses suffer from financial stress and what support can help relieve their tax burdens? 

Microbusinesses, usually family-owned businesses, sole traders and gig economy workers, make up a significant 60 per cent of small businesses in Australia.

For most Australian taxpayers, the prospect of a tax refund brings an additional boost, with returns averaging around $2800 per year. But for others, it’s crucial to acknowledge that not everyone experiences the same level of financial relief during this period.

Each year, 60,000-80,000 financially vulnerable taxpayers across Australia need but cannot afford tax advice, according to a research team led by Dr Ann Kayis-Kumar, Associate Professor in the School of Accounting, Auditing and Taxation at UNSW Business School.

A/Prof. Kayis-Kumar is the Founding Director of the UNSW Tax and Business Advisory Clinic, an international award-winning service that provides free tax and business advice, community education, and research-driven advocacy for those most in need.

“Most of the people who we help at UNSW Tax and Business Advisory Clinic are running microbusinesses, and most self-report experiencing overwhelming levels of financial stress.

“With an average tax debt of over $80,000, it is not surprising that over a third of our microbusiness clients rate their financial distress levels as a 10 out of 10,” she said.

The clinic supports people in serious financial hardship to navigate a system that is almost impossible to navigate without representation.

“This help is not simply tax advice, we help people in a crisis financially, often also living with severe mental health issues, survivors of domestic violence, and gambling, drug and alcohol addictions. By solving acute financial distress, we can help with other personal issues, therefore, improving the mental health of these individuals and the well-being of their families and communities,” said A/Prof. Kayis-Kumar.

Years of overdue tax returns and stress

Michael Walpole, Co-Founder of the Clinic and Professor at the School of Accounting, Auditing and Taxation, UNSW Business School said many millions of small or microbusinesses are “crashing in and out of the system” every year.

One of the primary challenges faced by microbusinesses is the lack of knowledge and expertise in completing their tax returns and business of activity (BAS) statements. Prof. Walpole said: “Very often, microbusinesses will not have saved enough money to pay the tax.”

Without proper guidance or knowledge, he said, microbusiness owners may find themselves teetering on the brink of bankruptcy. And many microbusinesses have multiple years of un-lodged BAS, with some even dating back to the year 2000, which has seen their Australian Taxation Office (ATO) penalties and financial obligations snowball.

The average microbusiness helped by the clinic has racked up eight years of overdue tax returns.

“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,” he said.

“Some microbusinesses have had tax returns outstanding for more than two years. I think our record is 30 years but that’s an outlier and non-lodged tax returns often come with penalties.

Microbusiness owners also experience significant levels of emotional stress as a result of their financial burdens. “It may have had a huge effect on their mental health,” said Prof. Walpole.

What is a microbusiness?
Microbusinesses are defined as a business that employs less than five people, including non-employing businesses.
Small businesses make up 98 per cent of all businesses in Australia and 60 per cent of those businesses are micro businesses.
Why do microbusinesses face financial challenges?

Microbusiness owners face challenging financial circumstances because of a range of factors.

Paul Viola is a lecturer in the School of Accounting, Auditing & Taxation at UNSW Business School, and also serves as a Clinic Supervisor for the UNSW Tax and Business Advisory Clinic.

He observed that microbusinesses 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.

“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. When there is a relationship breakdown, sometimes the spouse or partner taking the supporting role in the business gets left behind and doesn’t know what to do,” he said.

“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,” said Mr Viola.

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,” said Mr Viola.

When microbusinesses are set up, they can usually afford to pay an accountant to help them with tax obligations. But if they start to struggle, one of the first costs they can no longer is the accountant or advisor – leaving 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.”

Business coaching tools are vital for those in debt

The UNSW experts behind the clinic have identified that teaching and coaching clients to gain an understanding of how to complete their tax obligations is the right path forward.

“We've added a business coach element to the clinic now,” said Mr Viola.

“What we want to do is to give people the tools to gain an understanding of financial literacy and their tax obligations. This is so they can leave the clinic not needing to come back because they have the know-how to manage the financial aspect of their business.

“The first thing they need to understand is, it's not just about income tax. If they're in the business, they're going to be inclined to have to deal with probably at least three or four different types of taxes on a recurring basis.

“Whether it's income tax, or if they've got staff their obligations will include employment taxes and superannuation. If they are trading, there could be GST issues. Overall, there's going to be a number of things they’ll need to proactively do to get their head around these ongoing tasks, and it's our job to ensure they have the right tools, knowledge and experience to complete them,” he said.

Since launching, the clinic provided a remarkable 6,500-plus hours and $3 million worth of free tax advisory services, which play a vital role in assisting microbusiness to alleviate their debt and reduce their financial burdens and accompanying stress.