Mental health costs of managing tax for small businesses

Professional tax advice is needed to improve the mental health outcomes for small businesses in financial distress, says a UNSW Business School expert.

Business owner calculating tax return

“A lot of the clients that we see have to choose between paying for food or paying for a registered agent,” says Dr Ann Kayis-Kumar, Senior Lecturer and Tax Clinic Director, UNSW Business School.

Small business owners are suffering amid the COVID-19 pandemic. Many small businesses that were already financially fragile before, are now having to cope with the added stress of mass layoffs, closures and exceptional levels of uncertainty about the future.

Very little research is conducted into the mental health impact of financial stress on small business owners, but a current project run by the UNSW Health@Business Research Network aims to improve mental health outcomes for businesses in financial distress.

The project brings together experts including the Black Dog Institute’s Mark Deady and UNSW Business School’s Dr Ann Kayis-Kumar to help find solutions for small businesses struggling in the current economic climate, and their findings so far offer essential insights for business owners.

“So far, the idea that tax and mental health can be connected has been an unfamiliar one, but ours will be the first [project] of its kind, domestically and internationally, to track the mental health outcomes for people who are financially vulnerable in getting pro-bono tax advice,” says Dr Kayis-Kumar.

Outlook for small businesses in the current crisis

With the end of some government support measures looming, the current economic environment is adding extra pressure on small business owners.

“They’re going to be lying awake at night wondering what to do,” says Dr Kayis-Kumar, Director of the UNSW Tax Clinic and a Senior Lecturer in the School of Taxation & Business Law at UNSW Business School.

“It’s not just their business. It’s also their livelihoods, their families and everything else – so I understand the potentially significant levels of mental stress they’ll be experiencing, if not already, then very soon. It really is profoundly troubling,” she adds.

The current pandemic and subsequent social and economic restrictions have placed incredible strain on many small business owners, says Dr Mark Deady, a UNSW postdoctoral research fellow working within the Workplace Mental Health Research Program at the Black Dog Institute.

“Some of the big concerns raised include the managing of employees concerns both of the disease and risks involved in returning to work, but also the work implications, psychological stress and financial strain caused by reduced business/individual income, managing homelife/schooling etc., and the impact of ongoing job insecurity/uncertainty and unemployment (or the risk thereof),” explains Dr Deady.

The link between tax and mental health

The UNSW Tax Clinic recently submitted a recommendation to the government to establish a fully independent, low-cost external support mechanism which provides vulnerable taxpayers (who meet transparent criteria) funded, or part-funded legal representation. And the design and operation of the US Low Income Taxpayer Clinics program could be considered as a model for an Australian initiative, explains Dr Kayis-Kumar.

“You’ve got the financial wellbeing literature, and mental health literature, but then you’ve got the tax literature, which doesn’t talk back to the mental health and the financial wellbeing literature. So there’s this huge abyss between the two. And it’s known that poor mental health and financial wellbeing have a feedback loop spiralling down,” she explains.

So what exactly are the implications of poor tax health, and how does that loop back into mental health outcomes? Some 40 per cent of UNSW Tax Clinic clients are currently small businesses, mostly sole traders, who are behind on their taxes, explains Dr Kayis-Kumar.

“The vast majority of the clients are behind to the order of over eight years on average,” she says. This financial burden, of not being able to get everything up to speed and qualify for government assistance, is a substantial discouraging factor that is preventing many from qualifying for government assistance.

“We already are tracking the mental health outcomes and the financial stress levels of these people at the point that they first see us,” she adds.

Her findings so far suggest that while professional advice for financially vulnerable people is a real pinch point, without a qualified professional in their corner, those that are financially vulnerable could be facing issues as significant as bankruptcy.

“A lot of the clients that we see have to choose between paying for food or paying for a registered agent – you can’t expect people to prioritise paying an agent,” says Dr Kayis-Kumar.

Increased reform, research and resources

There is a desperate need for reform, says Dr Kayis-Kumar. While the government offers some COVID-19-specific support for small businesses, the challenge with some of the support is that it requires cash flow to receive a tax break, she explains.

“So more reform needs to be done in this space, and more ways to cushion the impact that this is having on small business should be implemented until things return to some level of normality,” she says.

She says there is also a need for further research into the effects of financial distress on mental health. The connection that tax has with a lot of these big social impact, social justice questions and problems has so far been under-explored – or not explored at all.

“Mental health and financial distress and how that intersects with tax is something that I think we are the only ones exploring,” says Dr Kayis-Kumar. She says more research in this space would ensure evidence-based practices.

The government has put the onus on being up-to-date with taxes on the individuals and small businesses, and the compliance burden for small businesses is overwhelming, adds Dr Kayis-Kumar.

From a broader policy and revenue perspective, she says there is also a cost vs benefits question around income and tax revenue versus cost, healthcare, and social costs associated with poor mental health resulting from financial stress.

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