Compliance cost big for small firms

From late 2012 to early 2013, Gupta and Sawyer asked 118 New Zealand small businesses to identify their internal and external tax compliance costs. Photo / Thinkstock

Tax compliance costs have increased for New Zealand small and medium-sized enterprises (SMEs) and the sector shoulders a disproportionately higher compliance burden than larger firms, according to an AUT and University of Canterbury survey.

Senior taxation lecturer Ranjana Gupta and taxation professor Adrian Sawyer found that despite Inland Revenue's efforts to reduce the tax compliance burden and the improved efficiency in the tax system, gross tax compliance costs as well as core accounting costs were regressive with respect to business size and were the greatest constraint to growth of the New Zealand small business sector.

From late 2012 to early 2013, Gupta and Sawyer asked 118 New Zealand small businesses to identify their internal and external tax compliance costs.

It found that the gross cost of complying with all taxes was estimated at $38,063 for the 2011-12 year ($30,855 internal costs plus $7208 external costs).

Recording information was the most time-consuming activity and accounted for more than 50 per cent of the total time spent on different activities by all businesses.

GST accounted for the largest portion of the internal compliance cost (mean $16,785, median $16,322), followed by income tax (mean $7453, median $7355).

Business size category results confirmed that gross tax compliance costs were regressive. The average amount spent on gross tax compliance costs in entities with annual turnover of less than $1 million was $48 per $1000 of turnover and in entities with an annual turnover of more than $1 million to $3 million was $15 per $1000 of turnover.

For entities with an annual turnover of $3 million to $6 million, it was $8.07 per $1000 of turnover.

Next came the internal time spent on tax compliance activities.

More than 50 per cent of the businesses agreed that keeping records for tax compliance improved the business record-keeping system and helped to maintain more accurate records but more than 88 per cent of businesses were unsure or unaware of small business tax concessions.

"The study calls for fresh thinking on simplification and the introduction of several initiatives aimed at making the tax compliance easier for small businesses," Gupta and Sawyer said.