Small Business Owners' Attitudes Toward GST Compliance: A Preliminary Study

Abstract

A significant body of research both internationally and in New Zealand has been devoted to understanding the factors that influence compliance with tax law. Early studies on compliance were primarily focused on individuals and income tax. Recent comprehensive reviews of the literature indicate that groups of taxpayers, such as small businesses, and compliance with other tax types, such as consumption taxes, remain under-explored.To contribute to the extant literature, this preliminary study extends prior work on the compliance attitudes or behaviour of small business owners (SBOs) by focusing on their tax attitudes toward New Zealand’s goods and services tax (GST) system. In particular, their perceptions of deterrence (eg chance of being audited or penalised), tax morale, social norms (eg other business taxpayer’s compliance attitudes), perception of the tax system (eg fairness, complexity, tax burden), and tax administration (eg trust in authority) are examined.The results show some evidence of “mental accounting” which is in line with Adams and Webley’s study. Not all SBOs perceived the GST system as being reasonably simple or easy to understand. Many owners also indicated that they relied on accounting software packages for recording their GST transactions and they appeared to assume their tax practitioners would pick up any errors they make. The results further indicate that tax penalty and tax audit are salient in the minds of SBOs. The majority of SBOs always tried to file a correct and timely tax return in view of the potential cost of incurring penalties for not doing so. Although the tax system was perceived as being reasonably simple, issues relating to internet transactions and GST on imports, and the burden of compliance cost of GST were particularly frustrating to SBOs. They also had different personal experiences in their dealings with Inland Revenue and different perceptions of Inland Revenue’s fairness. The SBOs’ GST morale with regards to proper invoicing and classification of goods and services was found to be positive. The majority would not feel good in falsifying invoices or misclassifying goods or services, although some suspected others did engage in such activities. Many are also aware of customers’ preference to pay cash to business owners to avoid GST and one-third of the sampled owners even admitted doing so themselves. These insights have several implications for tax authorities.