How free tax advice can support financial wellbeing
New research reveals a crucial need for pro bono tax advice to help improve the financial wellbeing of vulnerable communities
Financial stress is often associated with low income and can have severe short- and long-term consequences for individuals, families, and the community. Young people, in particular, are at increased risk of financial stress, with data showing they are becoming increasingly vulnerable to psychological distress.
According to Dr Youngdeok Lim, Senior Lecturer in the School of Accounting, Auditing and Taxation at UNSW Business School, there is an important but under-researched link between financial advice and financial wellbeing. Financial wellbeing, he says, comprises the following three dimensions:
- Being able to meet one’s expenses;
- Being in control of one’s financial situation; and
- Being free from financial worry/stress.
In a new study, Tax accounting for financial wellbeing: Quantifying the unmet need for pro bono tax advice, Dr Lim and UNSW Business School co-authors including Associate Professor Ann Kayis-Kumar, Professor Michael Walpole, Adjunct Senior Lecturer Mr Gordon Mackenzie, and Senior Lecturer Dr Jack Noone, explore the untapped potential for the tax accounting profession to advance social justice by providing free tax advice to the people who need it most. The paper is the first to identify and quantify the prevalence of tax issues faced by financially disadvantaged people who are unable to access professional tax advice. It has been accepted for publication in the Australian Tax Review journal and received the Cedric Sandford Medal for the best paper at the International Tax Administration Conference 2021.
The demand for pro bono tax advice is growing
For socially disadvantaged communities, attaining all three dimensions of financial wellbeing can be extremely challenging. Often, seeking financial advice is not top of mind when there are other more immediate things to worry about. Nevertheless, the need for financial advice, and in this case tax advice, exists.
In the study, the researchers conducted a population survey, administered to approximately 890 financial counsellors between September 2019 to December 2019, and uncovered three significant findings. First, the demand for pro bono tax advice has been steadily increasing over time with between 30.1 and 40.6 per cent of people in financial hardship needing tax advice – but unable to access it. The unmet need for pro bono tax advice is very high and the paper notes it is well beyond what existing Australian tax clinics can support under current funding structures.
Second, tax debts and tax stress, and in turn, the need for tax advice transcends socio-economic boundaries. This is an important finding because it indicates that socio-economic groupings are not a determinant of whether an individual or small business needs tax advice. However, there were some differences concerning the specific areas where tax advice is needed, suggesting different groups may have different needs. For example, the most common forms of tax advice required were assistance with lodging tax returns and handling tax debt, while an important minority identified a need for assistance in lodging objections (20 per cent), litigating against the ATO (7 per cent) or an audit conducted by the ATO (7 per cent).
Finally, those socioeconomically disadvantaged communities are the most likely to be running late in filing their tax returns, with some people running up to 30 years behind on their taxes. The authors say this is extremely problematic because individuals and small businesses with outstanding tax returns are often ineligible for many types of government support.
Read more: Does paying for tax advice save money? Only if you’re wealthy
The benefits of pro bono tax advice to communities
The provision of pro bono tax advice could promote clients’ financial wellbeing in several ways, says Dr Lim. “For example, tax clinic activities primarily address tax debts; support clients needing expert advice on submitting hardship applications, interest and penalty remissions; and provide representation to financially disadvantaged clients dealing with ATO audits and objections,” he says.
Specifically, the researchers found three main benefits to pro bono tax advice. In the short-term, pro bono advice helps to reduce stress and worry associated with tax arrears (such as debt collection activities). It can also remove the barrier to receiving social support, enabling people to meet their expenses. “Even though many clients will still have to pay tax arrears, tax advisors can also negotiate serviceable debt repayment schedules such that overall financial wellbeing is less affected,” says Dr Lim.
“Finally, clinics aim to empower clients with the knowledge and confidence to address their future tax needs. This puts people back in control of their finances and will be particularly important if tax laws change due to social distancing measures. Greater control allows people to better plan for financial security in the short- and long-term.”
The barriers to seeking pro bono advice
“Many people who are in financial difficulty do not even know that the support from financial counsellors exists within the social impact sector,” explains Dr Lim. And this is a big challenge.
“Most clients needed help with lodging multiple years of outstanding tax returns and needed advice with tax debt discussions. Importantly, financial counsellors are not able to complete or lodge tax returns. This presents a major gap in advice available to those in need,” he says.
So, what needs to happen for more financial advice to become freely available? National tax clinics have made a substantial contribution to vulnerable taxpayers in every state and territory in Australia. According to Dr Lim, the only way in which the vulnerable taxpayers identified in this study are likely to be helped is through the services being provided by tax clinics. “However, our findings indicate that the unmet need for pro bono tax advice is very high and well beyond a point that the existing Australian tax clinics can support under the current funding structure,” he warns.
What can people or businesses do if they can't afford or access advice? “Clients could simply seek advice from the Australian Tax Office (ATO). This will be helpful for some, but in situations where the taxpayer is in dispute with the ATO, it will be appreciated that they would often prefer independent advice, especially as the ATO has considerable power over taxpayers when it comes to collection matters,” explains Dr Lim.
Read more: Should there be a cap on tax advice deductions?
Tax clinics help meet the need for financial advice
Those who utilise financial counsellors tend to be in or close to a financial crisis, and they often require assistance with resolving debt from a low-income base – which becomes extremely complex, says Dr Lim. The goal is to get help to those who need it at a much earlier stage to prevent their situation from becoming worse.
But how should tax advice be disseminated? Dr Lim argued that it needs to be spread across all communities. “The introduction of additional national tax clinics in universities should be spread across communities experiencing different levels of socioeconomic deprivation. While it may be tempting to place new clinics in low socioeconomic areas, there is a need across all areas rather than just particular communities,” he says.
Dr Youngdeok Lim is a Senior Lecturer in the School of Accounting, Auditing and Taxation at UNSW Business School. For more information, please contact Dr Lim or the UNSW Tax Clinic.