Accounting systems and the record keeping function Pacific group

Like the Maori group, a significant number of the Pacific sample group used a computerised accounting system, with four of them undertaking the record keeping function themselves. Another four operators used paid assistance and one had family members undertaking the record keeping, since that business was jointly operated by both spouses. The high number of Pacific operators using paid assistance reflects their short term orientation and their lack of accounting proficiency. A significant number did not understand how taxes were calculated, and consequently, they accepted the IRD’s assessments of their taxable liabilities without question, which reflected also their high power distance values:

“Like this year we are paying $68,000 income tax and I don’t know how we get that. It is hard to get your head around it because you pay tax here and not pay tax there. Like we paid $12,000 provisional tax and I don’t know what that is. For PAYE and GST I got my head around that and I understand that. But for Income Tax I still haven’t got my head around that.” (P1)

105 “It is still very much a mystery for me. Like when I got the tax pack in

and I always sent it late and I finally got it in. It came back that I had to pay $1,500 and I wonder how did that happened? It is still a mystery to me as to how they (the IRD) work out the tax even when I try to work out from the IRD guide book. There are so many things that I can minus off for the tax, but because I didn’t have that, I didn’t include that in my return.” (P6)

6.4.5 Accounting systems and the record keeping function of SME operators

From their interactions with SME operators, both tax practitioners and business experts in this sample observed that the general record keeping of SMEs (particularly the smaller businesses) was less than satisfactory. In addition, tax payments were seldom planned for by SME operators, thus causing stress when taxes were due. This finding confirms the existing literature that tax payments are one of the main stressors for SMEs, as discussed in Chapter 2, section 2.6.2. Having no supporting documents for business transactions was another record keeping weakness identified. As described by TP3, SME operators were not proficient in their record keeping and were overly fixated on their cash balance, which confirmed SME findings in Australia, New Zealand and the United Kingdom (Ashby & Webley, 2008; Evans et al., 2005; Prescott, 2009). Furthermore, some operators were misinformed by their peers regarding their tax compliance obligations as experienced by BE3 and BE4:

“They have no idea of what tax they should be paying as they do not know how well they are doing, other than relying on their bank account. When they pay something, that change the whole picture and they look at the tax payment as a cost of the business as almost completely disassociated from the business . . . In one case for a business start up, they have thrown all the receipts away as they did not think that they were important. I can see that they must have incurred the expenses but cannot substantiate them. They came to us after 18 months because they are getting more worried about the tax department to file tax returns on time. When we do the accounts, we found a substantial amount of cash drawings and very little expenses.”(TP3)

“Most of the small businesses have a problem with paying taxes as they struggle with it like everyone else. When they come into the business new, they thought that it was tax free for the first year but we told them that it is not. We told them that the taxman will tax them based on how the business does in the first year and then they will assess that. Their second year is when they had a double whammy problem because they have to pay the taxes for their first year as well as the provisional taxes. They have not saved for that and they can’t understand that. They go by what people say that they don’t have to

106 pay in the first year, thinking that it is free and that it is forever. A lot

of that is misinformation. I think it is also a case of what they want to hear. They read into the bits that they want to hear.” (BE3 and BE 4)

Another common record keeping weakness of SMEs is mixing their personal transactions with business transactions to lower their tax liabilities. Due to fear of compliance and having to pay taxes, some deliberately operate below the GST registration threshold and/or operate in the cash economy, as observed by BE8:

“There is an unfortunate fear about taxation. We and far too many of us in the community are still operating in the black economy and that is fine provided you don’t become too successful. Well far too many of SMEs just don’t do anything because they operate below the radar. So long as they don’t operate above $60,000, they don’t have to be registered for GST. It is not until they are audited, then they are in trouble.” (BE8)

Given the above observations, it is important for SME operators to have a suitable accounting system, and accounting proficiency in order to successfully comply with their tax requirements.