SME tax compliance costs 2009: evaluation report 1

This report records the annual tax compliance costs for New Zealand small and medium size enterprises (SMEs) in 2009. It follows a similar survey conducted in 2004.

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Executive summary

• Evaluation purpose
• Policy context
• Evaluation methodology
• Key findings

Evaluation purpose

This report records the self reported tax compliance costs for New Zealand small and medium size enterprises² (SMEs) in 2009. It follows a similar survey conducted in 2004.

The information objectives of the 2009 survey and evaluation were:

• to measure SME tax compliance costs in 2009
• to measure the change in SME compliance costs since 2004. More specifically:
  • by how much and in what direction do compliance costs change?
  • which elements of compliance costs change?
  • which groups of taxpayers are affected?
  • what impact do the compliance cost changes equate to in the population overall?
  • to what extent can the changes be attributed to specific interventions?
• to evaluate the effectiveness of GST and provisional tax alignment at making tax easier for business.

This report meets the first bullet point above and provides a starting point for considering the others. Subsequent reports will consider the trends and changes in tax compliance costs since the 2004 benchmark survey.

Policy context

Tailoring interventions to make it easier for small and medium businesses to meet their tax obligations and to increase their confidence in the tax administration is an Inland Revenue priority.³ Simplification of tax administration interventions is a key focus of the Department's strategy and the Government has implemented several changes to simplify tax in recent years. The focus of the simplification programme is on reducing the stress, uncertainty and risks that these concerns place on small businesses.

The 2004 survey provided a baseline, before the introduction of several initiatives aimed at making tax easier for SMEs such as GST and provisional tax alignment, subsidised payroll intermediaries and a discount for early payment of provisional tax in the first year of business. Further changes impacting on GST, PAYE and FBT were introduced in 2009, as part of the 2009 Business Tax Measures packages. These included a higher once-a-month filing and payment threshold for PAYE and the introduction of a new threshold of $10,000: below which all business-related legal expenditure is fully deductible.

Further, KiwiSaver was added to employers' responsibilities in 2007.

Evaluation methodology

To maximise comparability between the benchmark survey and this one, fundamentally the same methodology was used as in 2004.

The population of interest was, again, New Zealand's SMEs; defined as small and medium businesses (based on number of employees and annual turnover) and sole traders with sufficient income from "self-employment"⁴. A disproportionate stratified random sample, totalling 5,000 SMEs, was drawn reflecting different levels of turnover, employee numbers, tax type.

A mail-out survey of small and medium businesses was conducted in September and October 2009. The overall response rate to the questionnaires was 35%. A total of 1,728 completed questionnaires were used in the analysis linked to key Inland Revenue extracted data. Data were weighted so that the results could be used to generalise to the entire population of interest.

A tax advisor sub-survey was additionally conducted in order to apportion external tax advisor compliance costs to different tax types. The return rate for this sub-survey was 54%.

Tax compliance cost definition

Both mean (trimmed) and median costs are included in the main results, with the following components:

• hours spent internally on each of the main tax types (GST, income tax, PAYE, KiwiSaver⁵and FBT);
• hours converted into internal compliance costs in dollars;
• external tax advisor costs in dollars; and
• "combined compliance costs" which is the sum of internal compliance costs and external tax advisor costs.

Information is also presented in relation to whom in the business spent the time on tax compliance activities (owner/partner/trustee/director, paid employee, unpaid family or friend) and on the level of stress involved in doing so.

Value of time analysis

The following dollar amounts were used to convert time into compliance costs, based on who in the business completed the tax activity:

• $61.12 (owners/partners/directors/trustees)
• $25.39 (paid employees)
• $33.31 (unpaid friends or relatives).

Key findings

When reporting overall combined compliance costs (reported in detail in Chapter 14), the compliance costs relate to all SMEs, unless otherwise stated, whether or not they pay a particular tax. For example, the total GST costs are spread over all businesses, not just those who pay GST. In earlier chapters the base used was those businesses who filed/paid a particular tax type. In some instances these data are also presented in this summary. Where this is the case it is acknowledged in the text.

Overall combined tax compliance costs

• The mean combined (internal + external tax advisor costs) tax compliance cost for all SMEs, regardless of size, is $5,557 per year. This compares with a median cost, for all SMEs, of $3,719 per year.
• Generally, mean combined compliance costs increase with size of business, as determined by the number of employees - from $4,138 for businesses with nil employees to $9,501 for businesses with six to 19 employees. Note there is a levelling effect with the mean combined compliance cost for businesses with more than 20 employees being $9,447 (Figure 1.1).
• Mean internal costs are $3,995 and mean external costs are $1,639, 71% and 29% of the mean combined cost respectively. The comparative medians are $2,384 and $1,098.
• Mean internal costs increase with business size (as determined by number of employees) from $2,992 for businesses with nil employees through to $6,646 for those with between six and nineteen employees ("small"). Where businesses have more than 20 employees ("medium") they decrease slightly to $6,088. This general pattern holds true for all individual tax types with the exception of income tax which continues to increase for businesses with more than 20 employees.
• Mean external costs increase with business size from $1,235 for those with nil employees through to $3,647 for those with more than 20 employees. There is no levelling effect for external costs.
• Compliance costs as a percentage of business turnover reduce markedly from 13% down to 0.3%. (Figure 1.2)

Figure 1.1: Internal and external compliance costs by business size, regardless of tax types filed/paid


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Figure 1.2: Overall compliance costs as a percentage of turnover


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Internal compliance costs

Across all SMEs, regardless of size or the type of taxes they pay/file:

• The mean number of internal hours spent on tax compliance is 77.0 hours, which equates to $3,995 per year. The respective median cost is $2,384.
• The amount of time spent relates strongly to business size, ranging from 52.1 hours for SMEs with nil employees to 159.8 hours for SMEs with 20 or more employees.
• The overall trend is for an increase in mean (trimmed) annual hours spent as turnover increases. The mean number of hours increases from 50.6 hours for SMEs with a turnover of less than $40,000 through to 141.4 hours for those with a turnover greater than $2 million.
• GST requires the greatest time commitment (34.7 hours on average for all SMEs), followed by income tax (21.2 hours), PAYE (11.4 hours), KiwiSaver (3.3 hours) and FBT (1.2 hours).

Personnel spending time on tax activities

These hours are drawn only from those SMEs which file/pay a particular tax type.

• Owners, partners, directors and/or trustees spend on average 55.0 hours a year on tax compliance, paid employees 18.3 hours and unpaid family and friends spend 2.8 hours.
• Larger businesses are more reliant on paid employees - increasing from 22 hours on average per year for SMEs with one to five employees to 179.7 hours for SMEs with 20 or more employees.

External tax advisor costs

• Across all businesses, regardless of size or whether they pay for an external advisor or not, the mean annual cost for external advisors is $1,639. This compares with a median cost of $1,098.
• 80% of SMEs pay for external tax services across all tax types.
• Income tax accounts for the largest portion of these external compliance costs (76%). The mean annual cost is $1,248 for income tax, $267 for GST, $45 for PAYE, $14 for KiwiSaver and $16 for FBT (all SMEs).
• Amongst those who pay external costs for a particular tax type, the mean annual tax related cost is $2,184.
• The figures for SMEs which paid external costs for the tax in question are: income tax $1,736, GST $716, PAYE $418, KiwiSaver $291 and FBT $220.

Tax specific compliance costs

Figure 1.3 compares the combined compliance costs for each of the tax types by business size. It is indicative only of overall combined compliance costs by business size. This is because it shows the sum of the individual tax types rather than the mean overall cost. These costs are for all SMEs regardless of whether a particular tax type is filed or not. Combined compliance costs are highest for GST and income tax.

Figure 1.3: Combined mean compliance costs (internal plus external) by size of business for individual tax types


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The following sub-sections summarise key findings from the study as they pertain to each individual tax type. Data are provided both across all SMEs regardless of tax type filed and for those SMEs filing a particular tax type only. These findings are described in detail in the relevant chapters of the report (chapters 5 - 14).

Income tax (including provisional tax)

Across all SMEs regardless of whether they pay income tax or not:

• Combined (internal and external) compliance costs are $2,369.
• $1,248 (53%) are external tax advisor costs compared with $1,184 for internal costs.
• 21.2 hours of internal time are spent annually on income tax.
• Compliance costs increase with business size from $2,000 to $4,205.

SMEs paying/filing income tax:

• 22.3 hours are spent annually on tax activities, equating to $1,244 of internal compliance costs.
• 19% of internal time was spent on dealing with tax advisors, nearly twice that spent by GST (10%) and PAYE (8%) filers.
• 81% of time (hours) (89% of the internal cost in dollars) spent by businesses on income tax is undertaken by owners, partners, directors, and/or trustees.
• Only in medium-sized businesses (20 or more employees) do paid employees undertake more of the income tax compliance burden than the owners, partners, directors and/or trustees.
• Those who use external tax advice for income tax spend, on average, $1,736 for income tax advice.

GST

Across all SME businesses regardless of size and tax types filed:

• Combined compliance costs for GST are $2,185.
• $267 (12%) are external tax advisor costs compared with $1,873 of internal costs.
• 34.7 hours of internal time are spent on GST.
• GST costs generally increase with business size ranging from $1,859 for businesses with nil employees through to $3,207 for those with between six and nineteen employees. There is a levelling effect for those with 20+ employees ($2,753).

SMEs filing GST:

• Businesses which file GST spend, on average, 37.4 hours annually on GST tax activities, equating to $2,018.
• 54% of this time is spent on the recording of information.
• 78% of time, spent by businesses on GST, is undertaken by owners, partners, directors, and/or trustees.
• Time spent on GST does not generally vary by turnover with the exception of those businesses with an annual turnover between $1.3 million and $2 million. The mean internal time spent for this group is 60.2 hours. For all other businesses, as determined by turnover, the mean number of internal annual hours is between 30.9 and 44.2 hours.
• Those who use external tax advice for GST spend, on average, $716 for that advice.

PAYE

For all SMEs regardless of size and tax type filed:

• Combined compliance costs are $626.
• $45 (7%) is the mean external tax advisor cost compared with a mean internal cost of $542.
• The mean internal time spent annually on PAYE is 11.4 hours.
• Costs increase with business size up from $12 for businesses with nil employees through to $1,970 for "small" businesses. The cost for "medium" businesses is $1,951, again demonstrating the levelling effect.

SMEs filing PAYE:

• The mean internal time spent annually is 24 hours across all tax activities, equating to $1,141.
• 21% of this time is spent calculating tax, completing and filing returns. This is a similar proportion to those dealing with all other tax types (income tax, 17%; GST, 20%; KiwiSaver, 20% and FBT (23%).
• Those employing more staff have markedly lower compliance costs per employee than those with fewer employees. The mean compliance cost per employee for businesses employing 20 or more staff is $44, rising to $534 for each employee for businesses with fewer than six staff.
• Those who use external tax advice spend, on average, $418 for advice on PAYE.

KiwiSaver

Across all SMEs regardless of business size and tax type filed/paid:

• Combined compliance costs are $186.
• $14 (8%) are mean external tax advisor costs compared with $157 for mean internal costs.
• An average of 3.3 hours is spent annually on KiwiSaver.

SMEs dealing with KiwiSaver:

• Mean internal time spent on KiwiSaver is 14.5 hours annually, equating to $660.
• 18% of the time spent relates to learning about tax laws. This is more than twice the proportion of time spent by GST (6%), Income tax (8%) and PAYE (8%) filers. This may be related to the relative newness of KiwiSaver.
• 10% of time spent relates to the dealing with Inland Revenue, noticeably more than the proportion of time spent by GST (4%), income tax (5%) and FBT (2%) filers.
• As business size increases, paid employees deal with more of the KiwiSaver burden than owner, partners, directors and/or trustees. Paid employees spend 53% of time dealing with KiwiSaver for small businesses (6-19 employees). This increases to 82% for medium businesses (20+ employees). In micro businesses (1 - 5 employees), paid employees spend 20% of the overall time their business spends on KiwiSaver.
• Those who use external tax advice spend, on average, $291 for advice on KiwiSaver.

FBT

Across all SMEs regardless of business size and tax type paid/filed:

• Overall combined compliance costs are $65.
• $16 (25%) are external tax advisor costs, compared with $43 for mean internal compliance costs.
• Annually, a mean of 1.2 hours is spent on FBT.

SMEs filing FBT:

• On average, 9.1 hours are spent annually on tax activities, equating to $318.
• Virtually no time spent by businesses on FBT is undertaken by unpaid friends or relatives. In terms of annual value, FBT compliance costs met by unpaid friends or relatives equate to $1 annually. This is noticeably lower than unpaid friends or relatives costs for any other tax type - GST ($54), PAYE ($28), income tax ($13) and KiwiSaver ($12).
• Those who use external tax advice spend, on average, $220 for advice on FBT.

Psychological costs

• 58% of all SMEs find meeting Inland Revenue requirements (ignoring finding the money) less than moderately stressful, 22% find it moderately stressful, and 18% find tax requirements more than moderately stressful.
• Generally, SMEs with more employees report higher stress levels (ignoring finding the money) than businesses without employees in regard to their overall tax requirements.
• 78% of SMEs dealing with KiwiSaver indicated that they find it less than moderately or moderately stressful to do so (including finding the money).
• Overall, FBT was the least stressful tax type (including finding the money) as indicated by those filing or paying each tax type.

Additional information

As well as further detail and combinations of the above variables, information is available in relation to the following:

• How SMEs processes staff wages.
• The type of accounting system used for GST, e.g. paper-based or computerised accounting software.
• Any audit activity over the last 12 months.
• Payment made for any external payroll services.
• Whether SMEs employ staff paying child support in the last 12 months, and how many hours were spent dealing with child support.
• Whether SMEs employ staff repaying student loans in the last 12 months, and how many hours were spent dealing with student loans.
• The number of SMEs within different industry sectors, e.g. agriculture, forestry and fishing (see Appendix F).
• Methods used by SMEs to file and pay GST and PAYE returns, e.g. manual, electronic.
• GST basis, e.g. invoice, or payments.
• GST filing frequency, e.g. monthly, two-monthly or six-monthly.
• Provisional tax option, e.g. safe harbour, estimator.

 

Date published: 30 Aug 2010

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