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Tax justice as social justice: Are financially vulnerable people and small businesses falling through the cracks?

Many of the most financially vulnerable people and small businesses are slipping through the cracks because they can’t afford a tax agent.

Insights Dr Ann Kayis-Kumar, UNSW 26 June 2020
— 5 minute read

There’s been a lot of press around the government’s many COVID-19 relief measures for individuals and small businesses. These range from JobKeeper to cash-flow boosts to the instant asset write-off.

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These measures take for granted that everyone will be up to date on their tax returns. Or, if you’re behind, you’ll be “nudged” to get back on track. Assumptions like these are risky because they’re not always what will happen in practice.

For example, if your business is cash-strapped and you’re already struggling financially and psychologically, paying a visit to your tax accountant mightn’t be a top priority — and indeed, you may not even have the cash to pay them.

In practice, what UNSW Tax Clinic is seeing is that many financially vulnerable sole traders are instead opting for JobSeeker. This is a significant problem because sole traders make up 62 per cent of all small businesses.[1] So, the knock-on effect is that many of the most financially vulnerable small businesses are slipping through the cracks because they can’t afford a tax agent.

What is the role of the National Tax Clinic Program?

A national tax clinic program was first proposed by then-inspector-general of taxation Ali Noroozi in a submission to the Secretary of the Treasury titled “Investigation into matters reported by the Four Corners program about small business dealings with the Australian Taxation Office” dated April 2018.[2] In this submission, it was suggested that the program would be:

… administered independently of the ATO, to provide assistance or funding for vulnerable, unrepresented taxpayers who may need to challenge the decision of the ATO, akin to the support provided under the US Low-Income Taxpayer Clinics (LITC) program.

This proposal was both forward-thinking and innovative, and attracted and maintained bipartisan support.

Following the successful prototype initiated by Curtin University (Perth, WA), which was launched in July 2018,[3] both the Australian Labor Party[4] and the Liberal Party[5] proposed the introduction of a National Tax Clinic Program as part of their 2019 federal election campaigns.

In 2019, the federal government established the National Tax Clinic Program by granting funds to 10 universities representing all regions of Australia to provide tax assistance and support to individuals and small businesses. Given their focus on providing tax advice to unrepresented taxpayers, this program presents a timely addition to the ecosystem of government-funded support services.

These clinics help to address the tax advice gap that otherwise exists between free tax help provided by the ATO and independent tax advice — a gap that is likely to grow in the economic downturn spurred by COVID-19.

What is UNSW Tax Clinic’s client profile?

At UNSW (each of the clinics around the country is slightly different), we specifically focus on helping the most vulnerable members of the community. So, nearly all our clients are direct referrals from the financial counselling profession. (Financial counsellors work in not-for-profit community organisations. They provide advice and support to people experiencing financial stress. Their services are free, independent and confidential.)

As such, our clients are vulnerable taxpayers who are often dealing with the financial implications of mental health issues, financial abuse, natural disasters, gambling addictions, substance abuse, an inability to afford food and medical care, and the risks of financial despair leading to self-harm.

Our clinic students and student volunteers (who are learning from the activity) help interview these clients and research the rules affecting their situation. This develops their tax technical skills and professional skills. While the clinic is student-led, students assisting UNSW Tax Clinic are not authorised to give advice, or to provide a tax agent service. Rather, the only people at UNSW Tax Clinic who give advice (as part of a tax agent service) are our Clinic Supervisors, who are registered tax agents.

Our small-business clients with debt issues often have substantial tax debts (averaging around $115,000) arising from multiple years of overdue tax returns and business activity statements (BAS). On average, we see around 36 outstanding BAS returns per client (ranging from 1 to 80).

Why are these clients so far behind?

Reasons for clients falling so far behind on their taxes are nuanced and highly varied. We’ve found a strong connection between mental health problems and tax problems (stemming from broader debt problems).

Stigma and fear around long-term overdue tax returns and tax debts can mean that people struggle to ask for help and become increasingly overwhelmed.

However, just as putting off a medical visit which might confirm a diagnosis reduces the chances of early detection of disease and timely treatment, taxpayers who ignore their tax problems might be making matters worse given the interest and penalties being charged on their tax debts.

Fortunately — unlike medical diseases — it’s possible to ask the ATO for waivers of debts, interest and penalties, or non-pursuit of tax debts.

However, our client base often does not have access to independent tax advice and support; someone with sufficient subject-matter expertise to help them. So, they need pro bono tax professionals who know the ins and outs of the tax laws to go in to bat for them.

Those who are least able to afford tax advice are also most likely to see a profound impact to their quality of life from having their tax problems resolved. This is an access to tax justice issue, and requires a stronger safety net in the form of pro bono tax clinics.

How can the tax profession help?

At present, legal professionals can engage in skills-based volunteering through Community Legal Centres (CLCs) with the added benefit of a National Pro Bono Professional Indemnity Insurance Scheme. Unfortunately, tax practitioners do not currently have such a framework in place for skills-based volunteering. This needs to change.

There are many benefits at both an individual level, firm level and community level of encouraging a pro bono culture in tax professionals — not least of which is the reputational benefit (improving the public’s perception not just of the firm but also of the wider profession). Other benefits include recruitment, development of skills and confidence in junior practitioners, and increased job satisfaction and retention rates.

The COVID-19 pandemic and its economic aftershocks put into strong focus the otherwise unmet need for pro bono tax advice and support. The additional financial pressures will likely result in more people experiencing high or severe financial stress within the coming years.

Accordingly, the unmet need for pro bono tax advice will continue to grow.

Dr Ann Kayis-Kumar, senior lecturer and tax clinic director, School of Taxation and Business Law, UNSW Sydney

[1] Australian Small Business and Family Enterprise Ombudsman, ‘Small Business Counts: Small business in the Australian economy’ (July 2019); available at: https://www.asbfeo.gov.au/sites/default/files/documents/ASBFEO-small-business-counts2019.pdf.

[2] Inspector-General of Taxation, Submission 1.3, available at: https://www.aph.gov.au/Parliamentary_Business/Committees/House/Tax_and_Revenue/2016-17AnnualReport/Submissions.

[3] Curtin University, ‘Curtin University opens new innovative tax clinic’ (27 June 2018); available at: https://news.curtin.edu.au/media-releases/curtin-university-opens-new-innovative-tax-clinic/.

[4] Leigh, A, ‘Free tax clinics will make tax less taxing – Media Release’ (19 November 2018); http://www.andrewleigh.com/free_tax_clinics_will_make_tax_less_taxing_media_release.

[5] Morrison, S, Australian Chamber of Commerce and Industry Annual Dinner Speech (28 November 2018); https://www.pm.gov.au/media/australian-chamber-commerce-and-industry-annual-dinner.

Tax justice as social justice: Are financially vulnerable people and small businesses falling through the cracks?
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