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Freudenberg, Brett; Chardon, Toni; Brimble, Mark; Isle, Melissa Belle --- "Tax Literacy of Australia Small Business" [2017] JlATax 5; (2017) 19(2) Journal of Australian Taxation, Article 2

Document Outline

Tax Literacy of Australian Small Businesses

Brett Freudenberg*a , Toni Chardon**, Mark Brimble* and Melissa Belle Isle*

Abstract

Small businesses are a critical component of economies, although they face a myriad of

issues, including their literacy in relation to a number of key business issues. In recent years

tax literacy has been argued as an important part of financial literacy. Research has

demonstrated that a person’s tax literacy is likely to be greater when they are self-employed

and operate their own businesses. However, whether this increased tax literacy is sufficient to

address the labyrinth of issues faced when running a business is questionable. This article

reports further evidence about the tax literacy of Australians who have conducted a business

in relation to GST, deductions and their compliance attitude. These findings can build the

foundation for future work to explore how tax literacy is an important component of financial

literacy for small businesses.

* Department of Accounting, Finance and Economics, Griffith Business School, Griffith University.

** University of Southern Queensland (email: toni.chardon@usq.edu.au; tel: +61 7 4631 5514).

a : contact author: b.freudenberg@griffith.edu.au; tel: +61 7 373 58071

Keywords: tax literacy; financial literacy; Australia, small business, compliance, deterrence, gst, cash

flow.

Page 1 of 46

Introduction

Small businesses are a critical component of economies around the world and Australia is no

exception. Small businesses are an integral part of the Australian economy accounting for

95.9% of all Australian private sector businesses,1 contributing some 34% of total gross value

added to the economy.2 There are over 1,062,000 individuals as sole traders conducting

‘micro’ sized businesses, and another 3,000 individuals conducting ‘small’ sized businesses.3

Furthermore, there are another 1,290,000 micro and small sized businesses conducted

through corporations, partnerships and trusts.4 It is estimated that small businesses employ

4.8 million people, representing 45.7% of all private sector employees.5 Of course these

figures do not include those in business like activities or those informal businesses in the

shadow economy.

Small businesses face a myriad of issues, including their literacy in relation to a number of

key business issues. In recent years tax literacy has been argued as an important part of

financial literacy.6 This is based on the idea that tax can influence financial investment

returns, as well as being able to access government benefits that are delivered through the tax

system.7 Preliminary Australian research into tax literacy and its relationship to financial

literacy has demonstrated that there are various demographics (similar to financial literacy)

that are at risk for low levels of tax literacy, such as women, those with low income and the

young.8 This research also demonstrated that a person’s tax literacy is likely to be greater

when they have more connection to the workforce. In particular, people who were self-

employed and operated their own businesses generally had the highest level of tax literacy.9

However, whether this increased level of tax literacy is sufficient to address the labyrinth of

issues faced when running a business is questionable. Prior research has regularly

demonstrated that small businesses can have issues when running their businesses, which can

1 Australian Bureau of Statistics. Counts of Australian Businesses, including Entries and Exits, Jun 2010 to Jun

2014, 8165.0 (Canberra, 2015). Count includes non-employing and businesses employing 1 to <20 employees.

2 Australian Bureau of Statistics, Australian Industry, 2013–14. Cat. No. 8155.0. (ABS, 2015).

3 Australian Taxation Office, Taxation Statistics 2013, (Australian Taxation Office, 2015).

4 Ibid.

5 Australian Bureau of Statistics, above n 2.

6 Toni Chardon, ‘Weathering the storm: tax as a component of financial capability’ (2011) 5(2) Australasian

Accounting Business and Finance Journal 53.

7 Toni Chardon, Brett Freudenberg and Mark Brimble, ‘Tax literacy in Australia: not knowing your deduction

from your offset’ (2016) 31(2) Australian Tax Forum 321.

8 Ibid.

9 Ibid.

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include financial management, owner capabilities and taxation.10 This, in part, can be related

to the large role of the owner in the day-to-day management of the business and the multiple

roles the owner may have.

Furthermore, a greater understanding of tax literacy is important as it could be related to tax

compliance behaviour of taxpayers.11 In a financial literacy context, the tax literacy of small

business operators can be seen to be of greater importance given that the wealth tied up in a

business can account for a large proportion of the retirement savings for the business

operator. This has been recognised by the Australian government through generous tax

concessions on the sale of business assets by small businesses.12 This article reports further

evidence about the tax literacy of Australians who have conducted a business in relation to

GST, deductions and their compliance attitude. These findings can build the foundation for

future work to explore how tax literacy is an important component of financial literacy for

small businesses.

The remainder of this article is constructed as follows. Section 2 will outline the notion of

financial and tax literacy, and how it can relate to business operations. Section 3 will provide

a detailed literature review about the issues confronting small businesses, particularly in

relation to tax compliance and its cost. Section 4 will outline the research methodology, prior

to the results being collated in Section 5. Possible avenues for future research will be outlined

in Section 6, before the article concludes.

10 James S. Ang, ‘Small business uniqueness and the theory of financial management’ (1991) 1(1) Journal of

Entrepreneurial Finance 1; Santonu Basu, ‘Problems of Small Business’ (1986) 5(4) A Journal of Applied

Economics and Policy 92; Melissa Belle Isle and Brett Freudenberg, ‘Calm waters: GST and cash flow stability

for small businesses in Australia’ [2015] eJlTaxR 18; (2015) 13(2) eJournal of Tax Research 492.

11 Margaret McKerchar, ‘Understanding small business taxpayers: Their sources of information and level of

knowledge of taxation’ (1995) 12 Australian Tax Forum 25; George Mihaylov, John Tretola, Alfred Yawson

and Ralf Zurbruegg, ‘Tax compliance behaviour in Australian self-managed superannuation funds’ (2015) 13(3)

eJournal of Tax Research 740.

12 Division 152 ITAA 1997 (Cth).

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Section Two

Financial Literacy

Financial literacy is the ability to make informed judgements and effective decisions in a

financial situation especially in relation to saving, investing and debt control.13 Financial

literacy can also be referred to as ‘financial capability’ which is a broader concept

encompassing an individuals’ personal characteristics, financial skills, attitudes; which can be

influenced by various factors in his/her micro and macro environment.14 For the purpose of

this article the term ‘financial literacy’ will be used to encompass capability as well.

Financial literacy should not be confused or interchanged with financial knowledge.15

Financial knowledge is recognising what is required in order to be financially stable, whereas

financial literacy is having the capacity and confidence to apply that knowledge to financial

decisions.16 Having financial literacy skills is an essential basis for both avoiding and solving

financial problems.17

Limitations in financial literacy can have immediate and long term effects on an individual’s

economic well-being.18 Low levels of financial literacy are associated with poor financial

decision making. International and Australian research suggests that individuals from certain

demographics can have limited financial literacy. These at risk demographics include those

aged less than 25 years, with low numeracy skills, no tertiary education, a level of income of

less than $25000, minimal savings and investments, blue collar occupation, female and being

of an ethnic minority.19 Higher levels of financial literacy have been associated with demand

for financial services, provision of incentives to open savings accounts and education in basic

financial concepts.20 This is broadly supported by recent research in Australia. Individuals

13 Sandra J. Huston, ‘Measuring financial literacy’ (2010) 44(2) Journal of Consumer Affairs 296, 303; Andrew

Worthington, The distribution of financial literacy in Australia (No. 185) (School of Economics and Finance,

Queensland University of Technology, 2004), 6.

14 Toni Brackin, Taxation as a Component of Financial Literacy: How Literate are Australians in Relation to

Taxation, (PhD Griffith University 2014), 22.

15 Huston, above n 13, 296-307.

16 Ibid, 296-310; Worthington, above n 13, 6.

17 Sonia Marcolin and Anne Abraham, ‘Financial literacy research: current literature and future opportunities’ in

P. Basu, G. O'Neill and A. Travaglione (eds), Proceedings of the 3rd International Conference on

Contemporary Business, Leura NSW, 21-22 September 2006, Australia, 3.

18 Sandra F. Braunstein and Carolyn Welch, ‘Financial literacy: an overview of practice, research, and policy’

(2002) 88 Federal Reserve Bulletin 445, 445.

19 The Social Research Centre, ANZ Survey of Adult financial literacy in Australia (Australia and New Zealand

Banking Group Limited, 2015), 2; Alejandro Drexler, Greg Fischer and Antoinette Schoar, ‘Keeping it simple:

Financial literacy and rules of thumb’ (2014) 6(2) American Economic Journal: Applied Economics 1, 1-2.

20 Drexler, Fischer and Schoar, above n 19, 5.

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identified as having the highest levels of financial literacy possessed one or more of the

following characteristics: a tertiary education, professional occupation, a business owner or a

member of a couple with no children.21 What this could indicate that there could be

‘transition’ issues for those first time business operators, especially if they are from a

demographic background seen as ‘at risk’. Once running business they may develop greater

financial literacy skills; however what occurs in the initial start-up phase? It has also been

proposed that personal financial skills and knowledge is acquired through trial and error.22

Australian research suggests that individuals aged between 45 and 49 years are the age group

with the highest levels of financial literacy.23 This may be attributed to having been exposed

to various financial products and services throughout their adult life, and still being actively

employed in the workforce prior to retirement age.

Business owners have been identified as having a higher level of financial awareness in

comparison to other individuals.24 However, the financial literacy required for individual

success is not as comprehensive as what is required to operate a small business. Previous

research suggests that owners of small businesses lack the required level of financial literacy

to make important financial decisions for their business.25

The level of financial literacy required can depend upon someone’s role. The solvency of

small business is a critical part of small business management and is dependent on the level

of professional financial literacy that the business owner possesses.26 Solvency is achieved

through careful cash planning and control which requires the owner to understand the

financial position and activities of the organisation.27 Financial literacy of small business

owners can impact firm growth and productivity and those with higher levels of financial

literacy have been known to be more effective when using financial products and are more

engaged in using and offering trade credit.28

21 The Social Research Centre, above n 19.

22 Marcolin and Abraham, above n 17, 7.

23 Ibid, 3.

24 Reva B. Brown, Mark N. Saunders and Rirchard Beresford, ‘You owe it to yourself: The financially literate

manager’ (2006) 30(2) Accounting Forum 179, 188.

25 Drexler, Fischer and Schoar, above n 19, 1-2.

26 Brown, Saunders and Beresford, above n 24, 179-80.

27 A. R. DeThomas and W. B. Fredenberger, ‘Accounting needs of very small business’ (1985) 55(1) The CPA

Journal 14, 21.

28 Miriam Bruhn and Bilal Zia, ‘Stimulating managerial capital in emerging markets: the impact of business

training for young entrepreneurs’ (2013) 5(2) Journal of Development Effectiveness 232, 234 and 238.

Page 5 of 46

Regardless of the abundance of research that suggests that use of financial statements is

valuable to the ongoing success of small business, it appears that small businesses in

Australia and overseas make limited use of financial statements to assist them in managing

their business.29 DeThomas and Fredenberger suggested the limited use in Australia to be a

result of owners’ lack of understanding of how to analyse the figures within the statements

and their reluctance to seek help to do so from their accountant.30 A notion that can influence

a businesses’ financial position is its tax obligations.

Tax Literacy

Chardon has argued that the notion of financial literacy needs to be expanded to include tax

literacy.31 The basis of this argument is that an understanding of tax systems is beneficial to a

person’s overall financial position. This is based on the idea that tax can influence financial

investment returns, as well as being able to access government benefits that are delivered

through the tax system.32 The level of knowledge that an individual possess of tax systems is

posited to have a relationship with their ability to budget, communicate with advisors, make

decisions and appropriate choices and understand their rights and obligations.33 In this sense,

it argued that there is a base level of taxation and superannuation literacy or knowledge

required in order to be financial literate.

It appears that the demographical relationship with taxation literacy can be similar to those

for financial literacy.34 While Australians are found to be broadly tax literate, they appear less

literate when it comes to specific tax and superannuation issues in comparison to financial

issues.35 It has been found that the financial literacy of individuals has a positive relationship

with increase in age, education, income; as well as occupation.36 While Chardon et al. found

similar characteristics for tax literacy; it was found that employment hours and employment

category have a stronger relationship with taxation literacy of individuals than age and

29 DeThomas and Fredenberger, above n 27; Robyn Dyt and Abdel K Halabi, ‘Empirical evidence examining

the accounting information systems and accounting reports of small and micro business in Australia’ (2007)

15(2) Small Enterprise Research, 1; Abdel K. Halabi, Rowena Barrett and Robyn Dyt,’ Understanding financial

information used to assess small firm performance: An Australian qualitative study’ (2010) 7(2) Qualitative

Research in Accounting & Management 163; Michael J. Peel, Nicholas Wilson and Carole Howorth, ‘Late

payment and credit management in the small firm sector: some empirical evidence’ (2000) 18(2) International

Small Business Journal 17.

30 DeThomas and Fredenberger, above n 27, 20; Halabi, Barrett and Dyt, above n 29, 171-74.

31 Chardon, n 6.

32 Chardon, Freudenberg and Brimble, above n 7.

33 Chardon, n 6.

34 Chardon, Freudenberg and Brimble, above n 7.

35 Ibid.

36 The Social Research Centre, above n 19.

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education.37 In particular, individuals that are involved in business appear to be more literate

in regard to individual taxation requirements than those who are not.38 These findings are

consistent with previous research by McKerchar in relation to tax knowledge of small

business owners. McKerchar found that an increase in the age of small business owners did

not seem to influence the level of tax knowledge of the business owner, and those with higher

levels of education did not necessarily have better tax knowledge.39 Research suggests

instead that business turnover and length of time in business has a strong connection to the

level of tax knowledge of small business owners.40 However, it is not clear the direction of

causality here, as there is scant empirical research in this area.

While small business owners may have higher tax literacy than the general public,

McKerchar argues that the level of tax literacy in relation to business tax systems does not

appear to be adequate for management of their tax requirements.41 As far back as the 1990’s,

research suggested small business owners needed to spend more time improving their level

of tax knowledge. In that research, McKerchar suggested small business owners experience

difficulty with understanding superannuation guarantee, Income Tax, Provisional Tax42 and

Fringe Benefits Tax.43 McKerchar found there was difficulty when determining what

deductions are allowable, which benefits are classified as a fringe benefit, and which

employees attracted superannuation guarantee.44 Complexity was also experienced in

determining the correct dates for lodgement and payment of the tax liability.45

While research found that more than 90% of small business owners suggested that they

pursued tax information from various sources including advisors and the ATO, this rarely

occurred on a regular basis.46 Evidence suggests that small business owners are not proactive

in improving their tax knowledge. This was substantiated during prior studies when

researchers provided information of taxes that were identified as being complex to the

respondents. The participants within the research did not make use of the information during

37 Chardon, Freudenberg and Brimble, above n 7.

38 Brackin, above n 14, 223.

39 McKerchar, above n 11.

40 Ibid, 37 and 40.

41 Ibid, 40.

42 The forerunner to the current PAYG system.

43 McKerchar, above n 11, 32-35.

44 Ibid, 34.

45 Ibid.

46 Ibid, 30.

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the time that the research was conducted.47 It was suggested that lack of uptake of the tax

information was primarily related to two reasons. Firstly, tax obligations were a low priority

for small business owners, with greater importance placed on income earning activities.48 An

opposing argument by McKerchar is that small business owners perceived that they were

knowledgeable about business tax matters.49 Once business owners believed that they were

knowledgeable about a specific tax matter they did not review or revise their tax management

practices at a later date. As a result small business owners were oblivious to any changes to

legislation or misrepresentations of tax law that occurred at a later time.50

Further reasoning for limited tax knowledge was determined to relate to expert advisors.

Small business owners placed great reliance on their accountant to carry out and understand

all tax matters relevant to their business.51 McKerchar indicated that there was a need to

improve tax knowledge of small business owners, however if they themselves did not believe

there was any shortfall in the tax information they possessed then any attempt at educating

them would be futile.52

In terms of trustees of self-managed superannuation funds (SMSFs), self-reported legal

literacy has been found to have a positive correlation to knowledge scores.53 Similarly, the

level of legal training can also have had a positive correlation to knowledge scores.54

Participants’ level of interest was negatively correlated to knowledge scores (i.e. those who

know least were most interested in knowing more).55 Again this could relate to the inertia

referred to by McKerchar in the sense of small business owners’ reluctance to up-date their

tax knowledge.

Tax Confidence

Models of financial literacy are not just about knowledge but also confidence. Confidence

relates to attitudes, behaviours, decision making, and the likelihood to seek advice; all of

which are aspects of financial literacy. Financial literacy research has demonstrated that there

can be over-confidence particularly in relation to basic financial concepts and investment

47 Ibid, 32; Ian G. Wallschutzky and Brian Gibson, ‘Small business cost of tax compliance’ (1993) 10(4)

Australian Tax Forum 511, 528.

48 McKerchar, above n 11; Wallschutzky and Gibson, above n 47, 528.

49 McKerchar, above n 11.

50 Ibid, 35.

51 Ibid, 36.

52 Ibid, 40.

53 Mihaylov, Tretola, Yawson and Zurbruegg, above n 11.

54 Ibid.

55 Ibid.

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decisions.56 In contrast, with tax literacy there appears to be greater alignment between

knowledge and confidence; and at times under-confidence. That is, if a person is confident

about his/her tax knowledge then this is likely to be aligned with the person’s knowledge, or

that their knowledge is greater.

Chardon et al. found that over-confidence is less common in relation to tax and

superannuation law than has been found in other financial literacy components.57 Generally,

participants were mostly under-confident. There were almost no instances of low self-

assessed confidence and high tax literacy scores, and a very small number who had very high

confidence and low tax literacy scores. Part of the reason for this greater alignment of

knowledge and confidence could be an awareness of penalties for incorrect application of tax

law, and therefore people are more cognitive of their actual knowledge.58

Research has found that the demographic with the greatest tax confidence were the self-

employed running a business, which was consistent with their greater tax literacy.59 In

contrast, lower tax confidence was more likely to be found in females, younger age groups

and those on lower incomes.60 Also, lower confidence in relation to taxation and

superannuation law issues is likely to be found in those with less participation in the paid

workforce (such as full-time students or those not in paid work) and those with lower

education levels.61

Overall it is argued that tax literacy in relation to business operations is important as it allows

people to know their rights and obligations, and thus allows business people to be proactive

in minimising their tax problems. In terms of tax law, evidence suggests that business

obligations lead to greater tax law literacy when compared to others in the population.

However, the adequacy of this literacy may be questionable, especially given the many issues

faced by small businesses.

56 Financial Literacy Foundation, Financial literacy–‑ Australians understanding money, (Financial Literacy

Foundation, 2007), avaialable at: <www.financialliteracy.gov.au/media/209293/australians‑understanding‑

money .pdf>; Gerry Gallery and Nathlie Gallery, ‘Rethinking financial literacy in the aftermath of the global

financial crisis’ (2010) 19 Griffith Law Review 130.

57 Toni Chardon, Brett Freudenberg and Mark Brimble, ‘Are Australians under or over confident when it comes

to tax literacy, and why does it matter?’ [2016] eJlTaxR 26; (2016) 14(3) eJournal of Tax Research 650.

58 Ibid.

59 Ibid.

60 Ibid.

61 Ibid.

Page 9 of 46

Section Three

Small Businesses Issues

While small businesses can be numerous and contribute substantially to the national

economy, they can face a number of issues, such as financial constraints, compliance costs,

and restricted management capacity.62 These issues can arise due to the characteristics of

small businesses, and their operators. Through analysis of prior literature, MacGregor and

Vrazalic63 have identified a list of characteristics that are unique to small and medium sized

enterprises (‘SMEs’) in Australia. It is argued that this SME characteristic are pertinent to

small businesses as well. Generally SMEs are internally controlled, funded with private

equity not public, the owner is normally the majority equity holder and often the only

individual deriving an income from the business activity and debts are secured by the owners’

private assets or the assets of an individual closely connected to the owner.64 Additionally,

they found that SMEs can have inadequate record keeping with the owners having a strong

influence in the decision making process.65

Skill strengths of small business owners at commencement of their business revolve around

the technical skill set that the owner possesses.66 Research suggests that small businesses are

lacking financial management skills at the start-up of their business (with the exception of

businesses related to finance or accounting).67 The skills of SMEs in relation to meeting tax

obligations will be explored in the following section.

Tax Compliance Issues

There are a number of issues that can influence a small businesses’ capacity to meet their tax

law compliance obligations. For example, an issue for small businesses is staying up-to-date

with their tax law obligations, as it has been found that the frequency of tax law changes can

62 Belle Isle and Freudenberg, above n 10.

63 Robert MacGregor and Lejla Vrazalic, ‘A Profile of Australian Regional SME Non-Adopters of E-commerce’

(2008) 16(1) Small Enterprise Research 27, 30-31.

64 Australian Bureau of Statistics, above n 1; Basu, above n 10; Cynthia Coleman and Chris Evans, ‘Tax

Compliance Issues for Small Business in Australia’ in Neil Warren (ed) Taxing Small Business: Developing

Good Tax Policies Australian Tax Research Foundation Conference Series 23 (Australian Tax Research

Foundation, 2003), 147.; Leonardo Liberman-Yaconi, Terrena Hooper and Kate Hutchings, ‘Toward a Model of

Understanding Strategic Decision-Making in Micro-Firms: Exploring the Australian Information Technology

Sector’ (2010) 48(1) Journal of Small Business Management 70, 72.

65 MacGregor and Vrazalic, above n 63, 30-31.

66 DeThomas and Fredenberger, above n 27.

67 Peel, Wilson and Howorth, above n 29, 19.

Page 10 of 46

increase the compliance cost for businesses.68 The owner-manager may have a central role in

managing the businesses’ tax obligations, and thereby the skill and knowledge of the owner

can be critical.69 While the role of advisors can be important to assist small businesses, due to

various reasons, including financial constraints and attitude, there can be a reluctance to

utilise them.70 However, meeting tax obligations appears to be a reason why a majority of

Australian small businesses do seek an accountant’s assistance.71

An aspect that could be influence a taxpayer’s compliance behaviour is their attitude towards

the tax system. McKerchar’s research suggested that non-compliant behaviour by taxpayers

was not necessarily intentional, and that their lack of tax law knowledge (‘literacy’) meant

that they were most likely to be unintentionally non-compliant.72 McKerchar found ‘evidence

of a high commitment to compliance’ but a lack of tax law literacy impeded a full realisation

of this.73

Research has demonstrated that education and tax law literacy may have a positive impact on

compliance.74 It appears that taxpayers consider that if they had improved tax law literacy

their compliance would improve.75 Increased tax law literacy may improve taxpayers’

attitude toward the tax system,76 and thereby may have a positive influence on the willingness

to be compliant.77 Of course whether their behaviour would change is questionable, but it

could assist those who do want to comply as suggested by McKerchar’s findings.78

More recently, Mihaylov et al. found that legal literacy in terms of SMSF regulation is likely

to be significantly higher for those trustees of compliant SMSFs compared to non-compliant

68 Phil Lignier, Chris Evans and Binh Tran-Nam, ‘Tangled up in tape: the continuing tax compliance plight of

the small and medium enterprise business sector’ (2014) 29(2) Australian Tax Forum 217.

69 DeThomas and Fredenberger, above n 27.

70 McKerchar, above n 11, 32; Wallschutzky and Gibson, above n 47, 528.

71 Chris Evans, Shirley Carlon and Darren Massey, Record Keeping: Its Effect on Tax Compliance (CPA

Australia, 2005).

72 Margaret McKerchar, The impact of complexity upon unintentional non‑ compliance for Australian personal

income taxpayers, Doctoral Dissertation (University of New South Wales, 2002).

73 Ibid, 298.

74 Paul Nzioki and Rawlings Osebe, ‘An analysis of factors affecting tax compliance in the real estate sector in

Kenya: a case study of real estate owners in Nakuru town, Kenya’ (2014) 5(11) Research Journal of Finance

and Accounting 1.

75 Natrah Saad, ‘Tax Knowledge, Tax Complexity and Tax Compliance: Taxpayers’ View’ (2014) 109

Procedia-Social and Behavioral Sciences 1069.

76 Knut Eriksen and Lars Fallan, ‘Tax Knowledge and attitudes towards taxation: A report on a quasi-

experiment’ (1996) 17(3) Journal of economic psychology 387.

77 Nurlis Islamiah Kamil, ‘The Effect of Taxpayer Awareness, Knowledge, Tax Penalties and Tax Authorities

Services on the Tax Compliance: (Survey on the Individual Taxpayer at Jadobdetabek and Bandung)’ (2015)

6(2) Research Journal of Finance and Accounting 104.

78 McKerchar, above n 72.

Page 11 of 46

ones.79 Consequently, it may be that higher levels of tax law literacy may lead to improved

compliance behaviour; although it could be compliance attitude driving the desire to be more

legally literate.

Another aspect that can affect taxpayers’ behaviour is the deterrence effect due to fines and

penalties for non-compliance. Allingham and Sandmo’s model of tax compliance predicts

that if detection is likely and penalties are severe, people will be more compliant.80 While the

evidence about the deterrence effect is mixed, studies have found that non-compliance

decisions can be indirectly related to the threat of penalties; larger fines are a more effective

deterrent than are frequent audits.81 Some studies even suggest that an increase of penalties

can have unintended undesirable effects, resulting in more tax evasion.82 The mixed evidence

about the deterrence effect has been attributed to such things as penalties for non-compliance

being too low, or corruption undermining the enforcement system.83 Swistak argues for small

businesses that penalties, while important, may not be the tool of ‘first-choice’ to improve

compliance in this sector, and instead there needs to be a focus on the motivation that tax

penalties can play a part in.84 Accordingly, the role of penalties and small businesses

compliance is deserving of greater investigation.

Part of the non-compliance for small businesses can be that they struggle to have adequate

record keeping practices. It should be acknowledged that smaller businesses are not likely to

have mandatory reporting requirements, which can be due to their close ownership structure

with little or no outside equity investment. This can mean that without tax obligations, small

79 Mihaylov, Tretola, Yawson and Zurbruegg, above n 11.

80 Michael G. Allingham and Agnar Sandmo, ‘Income tax evasion: A theoretical analysis’ [1972] Journal of

Public Economics 323. Barak Ariel, ‘Deterrence and Moral Persuasion Effects on Corporate Tax Compliance:

Findings from a randomized controlled trial’ (2012) 50 Criminology 27. Dina Pomeranz, ‘No Taxation without

Information: Deterrence and Self-Enforcement in the Value Added Tax’ (2015) 105(8) The American Economic

Review 2539. Colin C. Williams, Confronting the Shadow Economy: Evaluating Tax Compliance and

Behaviour Policies (Edward Elgar Publishing, 2014).

81 Nehemiah Friedland, Shlomo Maital and Aryeh Rutenberg, ‘A simulation study of income tax evasion’

(1978) 10(1) Journal of Public Economics 107.

82 James Andreoni, Brian Erard, and Jonathan Feinstein, ‘Tax compliance’ (1998) 36 Journal of Economic

Literature 818; Carol M. Fischer, Martha Wartick and Melvin M. Mark, ‘Detection probability and taxpayer

compliance: A review of the literature’ (1992) 11(2) Journal of Accounting Literature 1; Bruno S Frey,

‘Deterrence and Tax Morale in the European Union’ (2003) 11(3) European Review 385.

83 A. Mitchell Polinsky and Steven Shavell, ‘On Offense History and the Theory of Deterrence’ (1998) 18

International Review of Law and Economics 305; A. Mitchell Polinsky and Steven Shavell ‘On the Disutility

and Discounting of Imprisonment and the Theory of Deterrence’ (1999) 8 Journal of Legal Studies 1. Nahida

Faridy, Brett Freudenberg and Tapan Sarker, ‘They are a tax fearing people”: Deterrent Effect – Penalties, Audit

and Corruption in a Developing Country’ (2016) 3 Curtin Law and Taxation Review 1.

84 Artur Swistak, ‘Tax Penalties in SME tax compliance’ (2016) 40(1) Financial Theory and Practice 129.

Page 12 of 46

businesses may not have any mandatory requirement to report their financial position.85

Accordingly, a potential consequence of tax law obligations is that it makes small businesses

maintain records.86 A derivative effect is that it may result in small businesses realising

managerial benefits in the form of improved decision making and control over the business.

These managerial benefits can be as a consequence of the imposition of regular record-

keeping, especially for value added taxes, such as the goods and services tax (GST).87

Managerial benefits may include: improvements to the accounting information systems;

improvement to controls; improved decision making based on better (and more accurate)

records; advanced recording of transactions and time management.

There is some empirical evidence that small businesses perceive that the need to comply with

GST and other tax legislation has brought managerial benefits that might not otherwise have

occurred.88 This research found that those small businesses in a taxing jurisdiction were more

likely to consider they had accounting records with reliable and useful information, compared

to those businesses in a non-taxing jurisdiction.89 These findings would suggest that having

tax obligations can improve the record keeping practices of small businesses.

Belle Isle et al. found that for Australian small businesses complying with the GST helped

participants maintain their record keeping systems, and it assisted with their income tax

obligations.90 Such benefits can reduce the overall tax compliance cost incurred by

businesses, which is explored in the following paragraphs.

Tax compliance costs include three major components, namely monetary costs, time costs

and psychological costs.91 Monetary costs include money spent on tax professionals and

85 The exception to this is when small businesses seek finance from a bank, and then financial statements can be

required: Belle Isle and Freudenberg, above n 10.

86 Tran-Nam noted managerial benefits are ‘brought about by the need to have more stringent record keeping in

order to comply with requirements of tax law’: Binh Tran-Nam, ‘Tax compliance costs methodology – a

research agenda for the future’ in Chris Evans, Jeffrey Pope and John Hasseldine (eds), Tax Compliance Costs:

A Festschrift for Cedric Sandford (Prospect, 2001) 51, 55.

87 Phil Lignier, Identification and evaluation of the managerial benefits derived by small businesses as a result

of complying with the Australian tax system (PhD University of New South Wales, 2008), 25.

88 Phil Lignier and Chris Evans, ‘The Rise and Rise of Tax Compliance Costs for the Small Business Sector in

Australia’ (2012) 27(3) Australian Tax Forum 615.

89 Phil Lignier, ‘The Managerial Benefits of Tax Compliance: Perception by Small Business Taxpayers’ (2009)

7(2) eJournal of Tax Research 106, 127.

90 Melissa Belle Isle, Brett Freudenberg and Richard Copp, ‘Cash flow benefit from GST: is it realised by small

businesses in Australia?’ (2014) 29(3) Australian Tax Forum 417.

91 Jeff Pope, ‘The Compliance Costs of Taxation in Australia and Tax Simplification: The Issues’ (1993) 18(1)

Australian Journal of Management 69; Nahida Faridy, Brett Freudenberg, Tapan Sarker and Richard Copp,

‘The hidden compliance cost of VAT: An exploration of psychological and corruption costs of VAT in a

developing country’ [2016] eJlTaxR 7; (2016) 14(1) eJournal of Tax Research 166.

Page 13 of 46

expenses relating to taxation guides, books, communication and other incidental costs. Time

costs are incurred by the taxpayer mainly on record keeping for tax purposes, completing the

tax return and preparing the tax details for the tax authorities or for tax professionals. Psychological

cost can relate to the stress involved in tax compliance.92

Concerns have been raised about the costs and the regressive nature of complying with tax

obligations for small businesses. A significant portion of compliance costs consists of the

time and effort required to comply with tax obligations.93 Compliance costs can reduce the

economic efficiency of a business structure, especially if the compliance costs outweigh the

benefit obtained.94 They are also regressive, as the burden disproportionately falls on smaller

businesses.95

Recently, Evans et al. reported that compliance costs for small business remain high and

regressive.96 Research indicates that the estimated compliance costs for the small and

medium enterprise sector in Australia are $18 billion, which accounts for 1.2% of GDP or

14% of tax revenue.97 Smaller businesses also have higher compliance costs per dollar of

turnover than larger businesses: Table 1.98

Table 1: Tax Compliance Cost

Business turnover

Annual cost

Cost per $1,000

turnover

<$75,000

$3,400

$90

$75,000 — $2 million

$12,000

$12

$2 million — $50

$55,000

million

Source: UNSW and Chartered Accountants of Australia and New Zealand. (2014). Tax Complexity Research

Project, Sydney.

92 Faridy, Freudenberg, Sarker and Copp, above n 91.

93 Lignier and Evans, above n 88.

94 Francis Chittenden, Saleema Kauser and Panikkos Poutziouris, Regulatory Burdens of Small Business: A

Literature Review (University of Manchester, 2000), 10.

95 Board of Taxation, Scoping study of small business tax compliance costs: A report to the Treasurer

(Attorney-General’s Department, 2007), 7; Cedric Sanford, Michael Godwin and Peter Hardwick,

Administrative and Compliance Costs of Taxation (Fiscal Publications , 1989).

96 Chris Evans, Ann Hansford, John Hasseldine, Philip Lignier, Sharon Smulders and Francois Vaillancourt,

‘Small business and tax compliance costs: A cross-country study of managerial benefits and tax concessions’

[2014] eJlTaxR 20; (2014) 12(2) eJournal of Tax Research 453.

97 UNSW and Chartered Accountants of Australia and New Zealand. Tax Complexity Research Project,

(UNSW, 2014).

98 Ibid.

Page 14 of 46

Lignier and Evans in their study found that the average cost of complying with all taxes was

estimated at $32,389 for the 2009-10 tax year.99 This amount comprised of $20,129 for

internal costs and $12,262 for external costs; compliance with GST accounting for around 50

per cent of internal costs.

The ability to keep appropriate records can be part of the complexity of the GST system.

Compliance complexity relates to the difficulty of maintaining sufficient records to satisfy the

law, such as preparing and filing tax returns and responding to the tax authority’s notices and

audits.100 Record keeping appears to be a large component of GST compliance cost.101 While

this may be inevitable, it is important to appreciate that such record keeping may assist

businesses in making more informed decisions about their operations. Technically the tax

compliance costs should be reduced by these benefits. Indeed, net tax compliance costs are

defined as the gross tax compliance costs minus the tax compliance benefits.102

Another issue for small businesses is cash flow management.103 Previous research in

Australia and the United Kingdom (UK) suggests that small business owners are not actively

involved in systematic liquidity management practices.104 Few studies have investigated the

interplay of small business cash flow and taxation.105 Research suggests that cash flow of

small businesses is influenced by tax systems both in Australia and throughout the world.106

Researchers propose that cash flow stability has a negative relationship with tax liabilities.107

In the UK the largest reported reason for small business failure was an inability to settle

99 Lignier and Evans, above n 88.

100 Michael J. Graetz, The Decline (and Fall?) of the income tax ( W.W. Norton & Company, 1997).

101 Lignier, Evans and Tran-Nam, above n 68.

102 Lignier, above n 89.

103 Scott Holmes and Des Nicholls, ‘An analysis of the use of accounting information by Australian small

business’ (1988) 26(2) Journal of Small Business Management 57, 57; Peel, Wilson and Howorth, above n 29,

19.

104 Belle Isle and Freudenberg, above n 10; Peel, Wilson and Howorth, above n 29, 19.

105 Eliza Ahmed and Valerie Braithwaite, ‘Understanding Small Business Taxpayers Issues of Deterrence, Tax

Morale, Fairness and Work Practice’ (2005) 23(5) International Small Business Journa l 539; Belle Isle,

Freudenberg and Copp, above n 90; Chris Evans, Shirley Carlon and Darren Massey, ‘Record keeping practices

and tax compliance for SMEs [2005] eJlTaxR 13; (2005) 3(2) eJournal of Tax Research 288; Wallschutzky and Gibson, above n 47.

106 Ahmed and Braithwaite, above n 105; Belle Isle, Freudenberg and Copp, above n 90; Evans, Carlon and

Massey, above n 105; Lignier and Evans, above n 88; Michel Messina and Peter Walton, ‘The impact of

government on company cash flows in France and the United Kingdom’ (1998) 7(2) Journal of International

Accounting, Auditing and Taxation 273; Cedric Sandford, Michael Godwin, Peter Hardwick and Ian

Butterworth, Costs and Benefits of VAT, (Heinemann Educational Books Ltd, 1981); Wallschutzky and Gibson,

above n 47.

107 Margaret Drever and Patrick Hutchinson, ‘Industry Differences in the Determinants of the Liquidity of

Australian Small and Medium Sized Enterprises’ (2007) 15(1) Small Enterprise Research 60, 64, 65 and 74;

Karen Ness, ‘Small Business Success Factors in Regional Queensland’ (2004) 12(2) Small Enterprise Research

Page 15 of 46

outstanding tax debts.108 This could be because businesses use their outstanding tax

obligations as an easy source of finance to finance other aspects of their operations (i.e. use of

the GST to pay off other creditors).109 Findings in France and the UK suggest that the cash

flow is negatively impacted by tax systems that are paid in advance, whereas taxes that are

held and paid at a later date can be beneficial to cash flow.110

In Australia, the research findings are conflicting about the effect that taxation has on small

business cash flow. While some research suggests that Australian small businesses are not

unduly suffering from the impact of various forms of taxation, opposing arguments suggest

that cash flow is constantly impinged upon particularly where small business are responsible

to pay their own taxes and collect tax on behalf of others.111 Research suggests that other

business factors can be a contributing force on whether cash flow is influenced by taxation.

Factors identified include terms of trade, industry, cash flow management and low profit

margins.112

Overall, findings suggest that while small business owners may have improved literacy

compared to the broader public, it is questionable as to whether it is sufficient to operate a

business. In particular, the understanding of tax literacy of small businesses and its

interaction with such things as GST obligations, record keeping, deductions and attitudes

towards tax compliance is deserving of further investigation. This research sought to add to

our understanding about these areas.

Section Four

Methodology

This study was conducted in two stages. Stage 1 involved focus group discussions with both

individuals and advisers to gather data around where individuals consider taxation to fit within

a financial literacy framework, as well as which knowledge, skills and capabilities in relation to

taxation should be included as a base for measuring taxation literacy. The outcomes from the

focus groups were used to develop the survey questionnaire for stage 2.

1; Mervi Niskanen and Jyrki Niskanen,’ Small business borrowing and the owner–manager agency costs:

Evidence on Finnish data’ (2010) 48(1) Journal of Small Business Management 16, 17.

108 Ahmed and Braithwaite, above n 105, 554; Evans, Carlon and Massey, above n 105, 290.

109 Belle Isle, Freudenberg and Copp, above n 90.

110 Messina and Walton, above 106.

111 Ahmed and Braithwaite, above n 105; Evans, Carlon and Massey, above n 105, 290.

112 Belle Isle, Freudenberg and Copp, above n 90, 424; Evans, Carlon and Massey, above n 105, 310.

Page 16 of 46

Stage 2 involved a survey which gathered data that considered tax literacy, tax confidence,

GST knowledge, deduction knowledge, as well as compliance attitude. The main body of the

survey was designed around the results of the focus group analysis. Apart from the initial

demographic questions, the remainder of the survey questions fell into one of three broad

categories: confidence questions, knowledge questions and attitudinal questions.

The survey was conducted via an online platform (Qualtrics) with web‑link invitations sent

to participants via email or advertised via radio and Facebook. The sample was derived

through convenience or “snowball” sampling until a desired number of responses were

achieved. The sample was achieved through a number of means. In the first instance,

advertising was undertaken through university‑wide email communication to students and

staff at the University of Southern Queensland and Griffith University. Second, advertising of

the survey website took place through a radio interview and newspaper articles. Third,

advertising of the survey website took place via social media.113

After data checking and validation was completed, the final analysis resulted in 604 useable

responses.114 Of particular interest to this article are those participants that indicated some

business operational experience, which fell into three categories:

• Currently self-employed (n = 34) (referred to as ‘Current Business Operators’);

• Previous or current business operations which was GST registered (n = 77) (referred

to as ‘GST Registered Business’)115; and

• Previous or current business operations whether GST registered or not (n = 124)

(referred to as ‘Business Operators’).116

Below are the methodological issues and the demographics for participants for stage 2.117

113 For an analysis and discussion of the strengths and weaknesses of using Facebook see: Christine Brickman-

Bhutta, ‘Not by the Book: Facebook as Sampling Frame’ (2012) 41(1) Sociological Methods and Research 57.

114 For a more detailed discussion of the pilot testing and data checking process see Chardon, Freudenberg and

Brimble, above n 7.

115 The GST Registered Businesses includes some of those participates identified as Current Business Operators.

116 The 124 Business Operators includes the 77 GST Registered Businesses.

117 For a more detailed discussion of the demographics for the Stage 1 Focus Group see: Chardon, Freudenberg

and Brimble, above n 7.

Page 17 of 46

Demographics: Stage 2

Below are the demographic details for those 124 participants that indicated that they either

currently or previously operated a business: Business Operators: Table 2 . This demographic

detail is also compared to the total 604 participants who completed the survey.

When the Business Operators’ (n = 124) demographics are compared to the total survey

participants the biggest difference appears to be age, as there are fewer younger people who

have identified that they have been in business compared to the total survey respondents.

Otherwise, the demographic details for Business Operators are similar to the total survey

participants.

Table 2: Survey Demographics: Business Operators

Business Operators

Full Survey

Demographic

Characteristic

participants

Total

Percentage

(n – 604)

Gender

Male

29.03%

31.1%

Female

124

70.97%

68.9%

Age bracket

18-29

18%

31.5%

30-44

39%

38.2%

45-54

28%

19.5%

Over 55

124

15%

10.8%

Education level

Secondary Year 10 or less

Secondary (to year 12)

14.7%

Trade, apprenticeship or other TAFE

18%

16.1%

Undergraduate degree (Bachelor)

31%

27.2%

Postgraduate degree (Masters, Doctorate,

professional qualification)

40%

38.6%

Other (coded system missing)

124

0.5%

Total income

$0 – $20,000

11%

18.7%

$20,000 – $49,000

27%

23.2%

$50,000 - $100,000

40%

42.2%

$100,000 - $150,000

12%

9.1%

>$150,000

3.3%

Prefer not to say (coded system missing)

124

3.5%

Financial experience

Yes

23%

18.5%

124

77%

81.5%

There was a higher proportion of “females” (70.97%) to “males” (29.03%). Though ABS data

indicates that there are slightly more females than males in the adult population,118 the survey

sample is higher again for females than the population as a whole. Similarly, in terms of

118 Australian Bureau of Statistics, 3235.0 - Population by Age and Sex, Regions of Australia, August 2016

(ABS, 2016). Available at

http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/3235.0Main%20Features102015?opendocument&tabn

ame=Summary&prodno=3235.0&issue=2015&num=&view=

Page 18 of 46

small business operators, national data suggest that about one-third of small

businesses are conducted by females.119 This higher proportion of females to males

should be taken into account when interpreting the findings of the survey.

The education level of participants was also gathered. As can be seen, 71% of business

operators have either a Bachelor or postgraduate qualification of some kind. ABS data reports

that as of May 2016, the proportion of the adult population (15-64) with a non-school

qualification was 59%.120 Consequently, the sample is slightly biased toward the more

educated. Based on other surveys of adult financial literacy both in Australia and overseas,

this would tend to indicate that levels of tax literacy might be overstated in the final results.

Similarly, it is unlikely that any low levels of tax literacy found would be as a result of

sample bias towards those with lower levels of general education.

Income levels of business operators reveal that 78% had taxable incomes in the previous year

of less than $100,000. As the question asked for participants’ “taxable income”, it is

preferable to compare the sample to taxation statistics for consistency. The Australian Tax

Office (ATO) statistics for the relevant tax year that the survey was conducted demonstrate

that the average taxable income for individuals was $51,342.121 This average is consistent

with the total survey sample.

The final piece of demographic information gathered was in relation to whether or not the

participant had any previous financial experience. This was defined as the participant having

worked as an accountant, financial planner, investment adviser, or in the superannuation or

finance field. It can be seen that there were 23% of survey participants identifying as having

previous financial experience. This means that the vast majority (77%) of participants would

be regarded as having no specific financial experience therefore, issues of sample bias are

minimised.

119 Department of Industry, Innovation, Science, Research and Tertiary Education. Australian Small Business

Key Statistics and Analysis, (DIISRTE, 2012), 44.

120 Australian Bureau of Statistics, 6227.0 – education and work, Australia, May 2016 (ABS, 2016) . Available

http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/556A439CD3D7E8A8CA257242007B3F

32?opendocument

121 The survey was conducted in the 2012 tax year: Australian Taxation Office, Taxation statistics 2010–11,

( ATO, 2013). Available at www.ato.gov.au/About-ATO/Research-and-statistics/Previous-years/Tax-

statistics/Taxation-statistics-2010-11/?page=5#Chapter_downloads, at p 12.

Page 19 of 46

Section Five

Results

Stage One: Focus Groups

While the Focus Group discussion considered the tax system broadly, there were a number of

comments that related to those in business and the tax system. For example, in response to the

question in the discussion guide of “how do you perceive you or your clients understanding

of the taxation system?” comments by advisors expressed some concern about the knowledge

of persons with business experience and their heavy reliance on advisors:

Including clients who are experienced business people who’ve worked forever for

themselves and have been dealing with the tax department for 50 years, they’ve got no

idea how the tax system actually works, in my experience, other than the accountant

tells them to pay that amount and that’s what they pay. (Male, aged 31, Financial

Planner)

Such observations could support McKerchar’s findings about the high reliance that small

businesses tend to have on their advisors.122 Also, when discussing the important tax

components for someone to be financially capable one of the frequent concepts raised was

knowing the fundamentals of tax for small businesses.123

Also other important concepts identified for tax literacy were deductions and record keeping.

In terms of deductions there was an important distinction, as participants thought it was

important to understand what deductions someone might be entitled to, as well as an

understanding what a deduction meant. That is, a deduction was not ‘getting all your money

back’. Also, a common theme was about the importance of understanding what was

deductible (or not). Here, comments ranged from the importance of generally understanding

what one might be entitled to, through to understanding whether a specific item might be

deductible or not:

122 McKerchar, above n 11, 36.

123 Chardon, Freudenberg and Brimble, above n 7, 339.

Page 20 of 46

Generally assessable income, what is a straight out deduction, what needs to be

depreciated - general, you don’t need to know, you just need to know roughly, what it

is. ( Male, aged 23, Accounting)

Other themes that emerged were: the fundamentals of tax for small business (for example

basic GST concepts as well as the difference between deductible and depreciable items), the

importance of record keeping; and other state and federal tax obligations.124 Specific

comments about the importance of small business operators understanding their basic tax

obligations, particularly, the basics of GST included:

I also think there is a need to know how much tax you are going to pay. Particularly in

business you need to know about the GST. And what is payable and you probably also

need to know what is ordinary income is and what is a capital gain. (Male, aged 33,

Accountant)

Knowledge of the GST I suppose, that made everyone have to come in. If they were in

business before GST came in as [referring to other participant] was saying they

understand GST. It would have been a big thing. (Female, aged 21, Accountant)

In relation to record keeping, the discussions centred on what type of records needed to be

kept in order to substantiate claims for certain things:

A proper decent educational package will cover more than just that. It will cover

entrepreneurial activities and how to go about running your own business, what records

you need to keep... (Male, aged 45, Accountant)

With the understanding developed from Stage One focus groups, a survey was developed to

further explore taxpayers’ tax literacy and tax confidence.

124 Ibid, 341.

Page 21 of 46

Stage Two: Survey

Below is a discussion of the survey results for those three categories of business operators

who completed the survey, being: Current Business Operators; GST Registered Businesses;

and Business Operators.

Tax Literacy Score

The final version of the survey contained 65 questions, including ten demographic questions.

In total, 31 questions counted toward a participant’s overall tax literacy score (TLS): Table

3. 125 The other questions represented demographic, confidence or other questions. Mean TLS

is therefore expressed as a score out of 31. For the purpose of categorical analysis, the TLS

was also categorised from “poor” through to “high” tax literacy.126

For reference, the mean TLS (maximum score 31) of the entire 604 sample was 16.21

(52%).127 For those with either past or present business experience (Business Operators) the

mean TLS was greater at 18.52 (n = 124), which was somewhat lower than those who were

currently running a business of 18.56 (n = 34). This would tend to indicate that those with

current or past business operational experience have higher tax literacy scores than other

taxpayers.

It has previously been reported that the demographic with the highest TLS are Current

Business Operators (mean score 18.56).128 For those ‘working for an employer’ their TLS

mean score was 16.3. This is consistent with financial literacy surveys. For example, the

ANZ Survey found that those in paid work and those whose income came from salary, wages

or businesses, had higher financial literacy scores than the overall mean.129

125 Ibid.

126 Ibid.

127 Ibid.

128 Ibid, 343-344.

129 ANZ, ANZ Survey of Adult Financial Literacy in Australia, (ANZ 2008), 11. Available from

http://www.anz.com/resources/5/4/54a7b400413360d8b5d8bda2fd298cdf/Survey-Adult-Financial-Literacy-

2008.pdf. Accessed 15 June 2015

Page 22 of 46

Table 3: Tax Literacy Survey Correct Response Rates by Question

Number

Number Correct (% Total

not

Participants)

answered

Applying the meaning of Taxable Income.

316 (52.3%)

Calculating Taxable Income.

302 (50%*)

Calculating Assessable Income.

321 (53.1%)

Calculating tax payable using marginal rates of tax

432 (71.5%)

19 n/a

Applying marginal tax rates to an extra $1 of income.

448 (74.2%)

19 n/a

Applying the effect of Deductions.

263 (43.5%*)

29 n/a

Determine Deductibility of Transaction

Travel Home – Work

474 (78.5%)

50 n/a

Travel – separate places employment

302 (50%*)

50 n/a

Clothing -retail worker

153 (25.3%*)

50 n/a

Clothing – corporate uniform

498 (82.5%)

50 n/a

Lunch – whilst at work

534 (88.4%)

50 n/a

Lunch – at offsite meeting

175 (29%*)

50 n/a

Y 220 (36.4%)

Newspaper – owns minimum shares

50 n/a

N 199 (32.9%)

Interest – loan on investment property

394 (65.2%)

50 n/a

Medical expenses out of pocket

256 (42.4%*)

50 n/a

Applying the effect of Offsets.

274 (45.4%*)

29 n/a

Classify Spouse Rebate – Offset/Deduction

342 (56.6%)

33 n/a

Classify Rental Interest – Offset/Deduction

315 (52.2%)

33 n/a

Classify Super Co-Cont – Offset/Deduction

138 (22.8%*)

33 n/a

Classify Work Clothing – Offset/Deduction

500 (82.8%)

33 n/a

Classify Ed’n Tax Refund – Offset/Deduction

190 (31.5%*)

33 n/a

Classify Travel expenses – Offset/Deduction

474 (78.5%)

33 n/a

Knowledge of current rate of compulsory employer

344 (57%)

62 n/a

superannuation.

Awareness of superannuation being taxed at a lower rate

346 (57.3%)

62 n/a

than other investments.

Understanding tax on Capital Gains (taxed at marginal

169 / 28% *tax rate

61 n/a

rates with 50% discount sometimes applying)**

160 / 26.5% *50% discount

Understanding the meaning of negative gearing.

327 (54.1%)

61 n/a

Understanding the rate of Medicare Levy.

281 (46.5%*)

62 n/a

Understanding how Medicare Levy is calculated.

282 (46.7%*)

62 n/a

Awareness of ability to claim medical tax offsets.

319 (52.8%)

62 n/a

Understanding the threshold for medical tax offset.

147 (24.3%*)

285 n/a***

Notes: This table shows the number and % correct responses for each of the questions that counted toward the overall tax

literacy score. The total number of questions counted toward the score was 31.

* Number of Correct Responses <50%.

** Two marks available for this question.

***Flow-on question, so some participants not asked.

Page 23 of 46

It has been reported that there is an association between paid work and TLS and that it

generally increases for those either in paid work or those who are self-employed: Table 4 .130

This was also consistent with the ANZ survey findings. It is also possible to assert that TLS

generally increases for those that are self-employed or operate small businesses.

Table 4: Tax Literacy Score – Employment Category (Comparison of Mean Variances)

Current Small

Working for an

Business Operator /

I am not in

Other

Employer

Self employed /

paid work

Contractor

Working

for

-2.260*

2.398

1.689*

Employer

Current

Small

Business Operator /

2.260*

4.659*

3.949**

Self

employed

Contractor

Other

-2.398

-4.659*

-0.709

I am not in paid work

-1.689*

-3.949**

0.709

Notes: *= p < 0.10, **= p < 0.05, *** = p < 0.001. Where the test is a One-way ANOVA and the LSD results have been

reported

Table 5 details the areas of tax literacy that had the lowest rate of understanding separated by

employment category. For Current Business Operators, those items of tax literacy that had

the lowest level of correct responses were (with an understanding of 50% or lower):

• Capital Gains Tax (CGT) rate: 38.2%

• CGT discount: 44.1%

• Medicare rate: 47.1%

• Effect of offsets: 50%.

Other items of tax literacy with low rates of correct understanding for Current Business

Operators were also:

• Effect of deduction: 55.8%

• Medicare calculation: 55.9%

• Calculate taxable income: 67.6%

130 Chardon, Freudenberg and Brimble, above n 7, 343-348. While there is a relationship between employment

category and confidence category; this is less significant than it was for employment hours where p = .003.

Page 24 of 46

Table 5: Low Scoring Question Results by Demographic

Number and Percentage Correct for Question

Calc

Cap

Effect

Rate

Medicare

Total

Taxable

Gains

Deduct

Offsets

Medicare

Calculate

Income

Rate

Discount

Employment

Working for an

496

249

218

225

138

125

237

233

Category

39.7%

60.3%

Current Small Business Operator / Self

100%

employed / Contractor

41.2%

58.8%

Other

100%

30%

70%

I am not in paid work

100%

39.1%

60.9%

239

365

604

39.6%

60.4%

Notes: *= p < 0.10, **= p < 0.05,*** = p < 0.001 Where the test is a Pearson chi-squared.

GST Business Operators

Given that the focus groups raised the importance of understanding GST for those in

business, the survey asked those with current or previous business experience, whether that

business was GST registered or not. Of the 604 participants, 77 had been involved with a

business that was or had been GST registered. These 77 participants (referred to as ‘GST

Business Operators’) were then asked a series of questions about their experience with the

GST.

134 Ibid.

Page 28 of 46

The first question asked whether the GST Business Operators were confident in

understanding their business’ GST obligations. Responses to this question demonstrates a

high level of confidence with meeting GST obligations, as 71% of respondents either strongly

or slightly agreed they had confidence in meeting their GST business obligations. Only 22%

expressed either strong or slight disagreement with their confidence about this. Overall, this

would tend to indicate that GST Business Operators were confident about meeting their GST

obligations, which if correct would be re-assuring for revenue authorities.

The earlier research presented indicated mixed evidence about GST’s impact on cash flow,

with some evidence that the obligation to pay GST can be adverse to cash flow, particularly

in certain industries, or trading terms. With the surveyed GST Business Operators there

seemed limited concern about cash flow difficulties due to their GST obligations. A small

majority (55%) strongly or slightly disagreed that they had difficulty in paying their GST bill

at the end of the month/quarter/year. However, there were 31% of respondents that did

indicate some difficulty in meeting these obligations. This could indicate that for about one-

third of the GST Business Operators the GST could have an adverse effect on cash flow.

Although as indicated earlier, the cause of this cash flow difficulty could be due to poor

management skills, record keeping, or industry conditions beyond the GST.

One way the compliance cost of GST can be mitigated is through the realisation of

management benefits due to improved record keeping to aid business decision making. In

terms of whether there were any potential managerial benefits through improved record

keeping as a result of meeting GST obligations, 55% of the GST Business Operators either

strongly or slightly agree that their records were improved. However, there was some

ambiguity, as nearly one-quarter (27%) neither agreed or disagreed with the statement:

‘improved recording keeping due to having to lodge a Business Activity Statement (BAS)’.135

Again this could indicate concern about the record keeping practices of the GST Businesses

Operators. It should be recalled that approximately one-third noted difficulty in paying their

GST obligations. However, of the 24 participants that had strong or slight agreement with

135 A business activity statement (BAS) is a universal business form that is lodged with the Australian Taxation

Office (ATO) by Australian registered businesses. The BAS is used to report a number of tax obligations of the

business, including the GST, as well as instalments of income tax (known as pay as you go instalments

(PAYGI)), fringe benefits tax (FBT), and tax withheld from employees’ wages (known as pay as you go

withholding (PAYGW)). Depending upon the size of the business, and the relevant tax the BAS is generally

lodged monthly or quarterly, and will provide an overall ‘net’ position of the business’ tax obligations to the

ATO for the reporting period – which could be payment owing or a refund (especially in relation to GST input

tax credits).

Page 29 of 46

difficulties of paying GST only eight (33%) were neutral or lower in terms of recording

keeping improving due to lodging the BAS. This would tend indicate that the connection

between cash flow and record keeping due to the BAS is not strong; however there is not

sufficient data for a definitive answer about this possible relationship. Of course improved

record keeping will not automatically lead to better management decisions, as these records

need to be used for that purpose. On the data collected it is not clear whether this is the case

or not, and is an area for future research.

Advisors can be important in assisting small businesses to meet their tax obligations, as

asserted by comments made in the Focus Group. Over one-third (35%) of GST Business

Operators did strongly or slightly agree that they rely on their accountant or tax agent to assist

with meeting BAS or GST obligations. However, a majority of GST Business Operators

(57%) either strongly or slightly disagreed with the statement that they rely on their tax

agent/accountant to ensure that they are meeting their BAS or GST obligations. This could

indicate that many business owners rely on their own knowledge and skills to meet their GST

obligations. It should be noted that in terms of their overall tax compliance (not just GST),

there was a strong reliance on the use of a tax agent/accountant to manage their tax

obligations, with 64% currently having a tax agent/accountant or 11% having one in the past.

This meant approximately one-quarter (25%) did not have a tax agent/accountant to manage

their tax obligations (n = 123). This use of tax agents/accountants is similar to the Australian

population.136 Overall, these results could suggest that reliance on tax agents and accountants

could be more for non-GST tax issues, such as income tax. This could reflect the fact that

GST is transactional, and once a basic understanding is obtained about the GST treatment of

a transaction and provided a businesses’ transactions remain similar then little advice or

assistance is required. This result is consistent to the research by Rutley et al. which found

that the main reason for small businesses to engage a tax professional was annual tax returns

(68%); whereas BAS related issues was only 39% and GST management was 9%.137 This

may raise concerns about GST compliance, but note there are lower educational requirements

for BAS agents, which could reflect overall less complexity in this area.138 Of course, there

could be a preference for greater utilisation of tax agents or accountants for GST, but due to

constraints, such as cost, this may not occur.

136 Australian Taxation Office, Taxation Statistics 2011-12, (Australian Taxation Office, 2014).

137 Robyn Rutley, Sophie Elliott and Raelle Tatarynowicz, ATO – Small Business Engagement Report (TNS,

2016), p 7.

138 For the educational requirements of BAS agents in Australia see: https://www.tpb.gov.au/register-bas-agent

Page 30 of 46

Table 9: GST Obligations

Question

Strongly

Slightly

Neither

Slightly

Strongly

Disagree

disagree

Agree or

Agree

disagree

I am confident I understand/understood all of my GST

obligations for my business

(13%)

(9%)

(6%)

(36%)

(35%_

I often have/had difficulties paying my GST bill at the

end of the month/quarter/year.

(45%)

(10%)

(13%)

(22%)

(9%)

My record keeping has improved as a result of having to

lodge a Business Activity Statement (BAS)

(10%)

(8%)

(27%)

(26%)

(29%)

I rely on my tax agent/accountant to ensure I am meeting

my BAS or GST obligations

(38%)

(19%)

(8%)

(17%)

(18%)

The number of changes in the tax law adversely affects

my confidence in how the tax system applies to my

(12%)

(6%)

(23%)

(34%)

(25%)

business.

I am confident I understand the difference between a

business purchase which is deductible (ie in full in one

(12%)

(6%)

(13%)

(35%)

(34%)

tax year) and one which is depreciated (claimed over a

number of years)

There is a concern that small businesses may struggle to stay up-to-date with tax changes, as

while they may initially undertake learning they may be reluctant to maintain their

knowledge.139 The frequency of changes in the tax laws has been identified as one of the

major reasons for increasing complexity for small business advisors.140 As seen in Table 11, a

majority (59%) of the GST Business Operators in this research either strongly or slightly

agreed that changes in the tax law adversely affects their confidence in how the tax system

applies to their business. There was only a very small disagreement (either strongly or

slightly) with this statement (18%). Overall this could suggest that tax changes do affect the

confidence of businesses in understanding their tax obligations. In some ways this could be

positive, in the sense that at least GST Business Operators acknowledge their confidence is

undermined by changes in the tax law, so with this acknowledgement hopefully they would

seek advice or resources to determine what the current status quo is. However, business

operators need to be aware of the ‘changes’ to seek help, and this is where pro-active advisors

can be important in educating business operators about relevant changes that could affect

their operations.

139 McKerchar, above n 11, 36.

140 Brett Freudenberg, Binh Tran-Nam, Stewart Karlinsky and Ranjana Gupta, ‘A comparative analysis of tax

advisers’ perception of small business tax law complexity: United States, Australia and New Zealand’ (2012)

27(4) Australian Tax Forum 677, 708.

Page 31 of 46

Deductions

Given the Focus Groups expressed concerns about businesses deductions, all participants

with business experience – Business Operators (n = 123) were asked a knowledge question

about what factors are relevant in determining whether a business purchase is deductible or

depreciated. Participants were able to select all the factors that they thought applied.141 33%

(40 out of 123) of participants chose one or both of the correct factors (being ‘whether the

cost is over or under $1,000’; or ‘whether the item will last more than one year’).142 Another

24% (29 out of 123) expressed that they would rely on their accountant to advise them of the

correct treatment. Overall this would suggest that the majority (56%) of Business Operators

either had correct knowledge about how to determine whether a business purchase was

potentially depreciable or not; or would rely on their accountant’s advice. Of course, it does

mean that approximately 44% of respondents got the business purchase question incorrect or

were unsure about the relevant factors. This 56% correct response rate is similar to the ‘effect

of deduction’ response rate in the overall tax literacy score for those current business

operators: Table 5 .

GST Business Operators (n = 77) were asked an additional confidence question about

deductions. GST Business Operators expressed a strong confidence in understanding the

difference between immediately deductible business purchase compared to one that is

depreciated over time, as over two-thirds (69%) either strongly or slightly agreed with the

statement. In considering whether this confidence was aligned with their tax literacy in terms

of whether a business purchase is deductible or depreciated, there would appear some

alignment. For GST Business Operators who indicated strong or slight depreciation

confidence, approximately 34% (18 out 53) got the business depreciation question correct.

Also, another 30% (16 out 53) indicated that they would rely on their accountant’s advice to

determine the question of deducting or depreciating. Together this means that 64% of those

that expressed confidence knew the correct answer or would rely on their accountant to

determine the correct tax treatment. The remaining 36% while confident, got the later

depreciation question incorrect. In comparison, those GST Business Operators that had low

depreciation confidence (either strongly or slightly disagreeing), only 28% (4 out 14) got the

later knowledge question correct, with 21% (3 out 14) relying on their accountant’s advice to

141 The factors to choose from: (a) whether the cost is over or under $300; (b) whether the cost is over or under

$1,000; (c) whether the item will last more than one year; (d) whether the item will last more than five years; (e)

what my accountant advises me; (f) I am not sure.

142 Given the survey was conducted in 2012 these were the factors relevant for a business operator at that time.

Page 32 of 46

assist. Overall this means only 49% of GST Business Operators with low depreciation

confidence knew the correct answer or would rely on their accountant. This can be contrasted

to the 64% for those who were strongly or slightly confident. Also, 50% (7 out 14) with low

depreciation confidence got the depreciation knowledge question incorrect, which is a larger

incorrect percentage compared to those with higher confidence (36%). Overall, this would

tend to suggest that there is some alignment with tax confidence and tax knowledge, and is

consistent with the prior confidence work by Chardon et al. which reported that under and

over confidence is less common in relation to tax and superannuation than other financial

concepts . 143

A technique used to encourage expenditure is the offer of business tax deductions, which has

been used by retail marketers,144 as well as governments. For example, after the global

financial crisis the government offered small business incentives to purchase business

equipment to try to simulate the economy.145 A question in the survey asked ‘What impact

does whether a business purchase is deductible or depreciable have on whether I make the

purchase for my business?’

Of the 124 Business Operators answering this question, 21% indicated that such a tax effect

does have a large effect on their business purchasing decisions, with 23% indicating that it

had a slight effect. The biggest grouping was at 32% indicating that it had possibly some

effect, with 23% indicating that it had no effect at all. While this would suggest that there is

some incentive for small business to purchase due to the tax effect, it does not appear

especially strong as other factors could be playing a role, such as the availability of finance to

purchase such capital items.

However, when considering those motivated to purchase due to the deduction (large or slight

effect; n = 55), nearly 70% (n = 38) of these Business Operators got the technical

deduction/depreciation question incorrect. While 15 of these would rely on their accountant’s

advice in making the final decision to deduct or depreciate, it is suggested that this is of

concern as a large majority could be making purchasing decisions without knowing whether

the item is immediately deductible or instead depreciated. This lack of tax literacy could have

143 Chardon, Freudenberg and Brimble, above n 57.

144 For an example of stationery retailer Officeworks campaign to encourage small businesses to purchase prior

to the end of financial year see: https://www.officeworks.com.au/campaigns/happy-tax-place#/

145 See:

http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetR

eview201112/CarTax

Page 33 of 46

an adverse consequence on cash flow if the after-tax cost is greater than originally

appreciated.146 For those not motivated by the tax deduction (no effect at all, n = 28), only

50% of those Business Operators got the technical deduction/depreciation question incorrect,

with other 50% either correct (n = 9) or relying on their accountant’s advice (n = 5).

Compliance attitude

Given the importance of record keeping raised in the Focus Group discussions, a number of

questions considered business taxpayers’ attitude towards their compliance requirements,

including recording keeping. Overall, the response (n = 123) would indicate a strong positive

attitude towards complying, as 91% of the Business Operators indicated that it was very

important (61%) or important (30%) for them personally to ensure that they comply with

their tax obligations (i.e. lodging tax returns on time and paying on time). Only 2% thought it

was insignificant, 1% slightly unimportant, with 7% neutral in their consideration.

Another question explored to what extent it was important for Business Operators to ensure

that they comply with their recording keeping obligations for tax (i.e. keeping records of

claims that you have made). Again there was similar strong compliance response, with 61%

indicating that it was very important and 34% specifying that it was important: meaning that

95% thought it was important. This meant that only 3% were neutral and 2% thought it was

insignificant. This result is similar to McKerchar’s147 prior research, and would tend to

indicate overall a strong compliance attitude of business taxpayers towards their tax

obligations.

In exploring the potential consequences should a business taxpayer fail to comply with their

record keeping obligations (i.e. failing to keep a record of an item that you claimed as a

deduction), Business Operators were asked to select what they considered the potential

consequences were (with them being able to choose multiple consequences). In descending

order, the perceived consequences of failing to comply with their record keeping obligations

were identified as:

• 108: Paying a fine/penalty;

• 68: Paying interest on late payments;

• 20: Increased bills from tax advisor/accountant;

146 Given the time value of money, the after-tax cost would be lower if a purchased item has to be depreciated

rather than immediately deductible.

147 McKerchar, above n 72.

Page 34 of 46

• 19: Financial difficulty;

• 14: Going to jail;

• 11: Loss or sale of assets; and

• 4: Having a bad credit rating.

This would suggest that Australia’s fine and penalty structure, as well as interest on late

payments, plays heavily on the minds of business taxpayers in terms of the reasons why they

must keep records. This would support the notion of the deterrent effect in promoting

taxpayer compliance behaviour. Although as McKerchar noted that even with a positive

compliance attitude there can be unintentional non-compliance.148

While there was a strong suggestion of compliance with tax obligations, including record

keeping, participants were then asked about the period of time that they were required to keep

records. Of the 122 Business Operators answering this question, only 24% chose the correct

response of five years; although 5% did choose the alternative correct response of ‘depends

on the circumstances’. The majority of participants (58%) thought three years was the

required time period to keep records, with 2% thinking two years, and 11% thinking it was

longer than five years. Interesting no Business Operators choose ‘not sure’ which may

suggest some confidence in their responses, even though over two-thirds were incorrect. This

raises some concerns about knowledge about maintaining tax records.

Overall comments

Overall, the results demonstrated that business operators, including those with past

experience, had greater TLS than other demographics. However, areas of lower tax literacy

for these business operators related to the CGT rate, CGT discount, Medicare rate and effect

of offsets. Also business operators had higher levels of tax confidence, that appeared to be

increase with the number of employees. While there was confidence with meeting GST

obligations, there was mixed evidence about GST’s impact of cash flow, as well as the

realisation of management benefits. In terms of business deductions, a majority of business

operators had the correct understanding, which appeared to be consistent with their

confidence in this area. While there was a strong positive compliance attitude, there is still

the potential for unintentional non-compliance due to insufficient (or not up-to-date)

knowledge which was illustrated in terms of knowledge about retention of tax records.

148 Ibid.

Page 35 of 46

Section Six

Limitations and Future Research

The study has a number of limitations that should be considered when evaluating the findings

of the research. The conclusions drawn from the survey conducted are limited by the sample

size and the characteristics of those participants in the survey. Also, it is not certain to what

extent these Australian findings could be generalised to other jurisdictions. However, these

results could form the basis for future research.

Future research could consider what precise areas of tax literacy is required for business

operators, and then test what are the areas that are the weakest. Also research could look at

the compliance attitude of small businesses and consider whether it does align with

taxpayers’ actions. Research could analyse more deeply whether there is a relationship with

tax literacy and the tax compliance behaviour of taxpayers. This could include analysis to test

the relationship between tax knowledge and tax confidence, and whether this influences

compliance behaviour. The role of tax and small business cash flow is deserving of greater

attention, especially the potential relationship with tax literacy and confidence. This could

investigate further the motivation to enter into transactions for the potential tax effect and

actually tax literacy.

Also future research could try to assess the direction of causality between that business

turnover and length of time in business and the level of tax knowledge of small business

owners.

Given that one-third of GST Business Operators indicated problems with GST compliance

future research could explore this in more detail, including what is the psychological cost of

complexity with tax, and how does this compare to the other components of tax compliance.

Additionally, it could be investigated what is it about GST that can be adverse to cash flow?

Is it inherent weakness in business practises, trading relationships, tax law design, tax law

administration or something else?

Additionally, the recording keeping due to tax obligations, including the BAS, could be

investigated further especially in relation to whether there is the potential for managerial

benefits to be realised. This could consider whether the current format of and timing tax

Page 36 of 46

reporting, such as the BAS and income tax return, aid or hinder the realisation of these

managerial benefits.

However, of the 24 participants that had strong or slight agreement with difficulties of paying

GST only eight (33%) were neutral or lower in terms of recording keeping improving due to

lodging the BAS. This would tend indicate that the connection between cash flow and record

keeping due to the BAS is not strong; however there is not sufficient data for a definitive

answer about this possible relationship.

Research could also consider how best to address changes in the tax system, as this appears to

decrease taxpayers’ tax confidence. This is particularly important as there may be a

reluctance by small business to up-date their tax knowledge.

The role of advisors appears to be important to assist small businesses with these changes,

and so research could consider the role of advisors to assist the tax law literacy of small

businesses. This includes understanding and measuring advisors own legal literacy, as it

appears non-lawyers can play an important part as an initial source of advice when people are

faced with a legal, such as tax law, issue.149

Conclusions

Small businesses are acknowledged as an important part of the economy, but they face

various challenges in managing their success. Some of these challenges can be due to

inherent characteristics, or economies of scale in dealing with regulatory requirements. The

opportunity to participate in business can lead to financial opportunities for those operators.

Financial literacy surveys have found that those operating a business can have greater

financial literacy. It has been argued that financial literacy should be broadened to include tax

law literacy. Initial research has found that Australian small business operators appear to have

a higher tax literacy, and tax confidence. To enhance our understanding, this article reported

further data on the tax literacy of Australian small businesses.

Firstly the article summarised the literature in terms of financial literacy and how tax law can

be a part of it. Then the literature in relation to small businesses was canvassed, including in

relation to tax compliance, tax literacy, tax confidence, and tax complexity. It was found that

tax literacy was an important part of overall financial literacy of small business operators

149 See: Brett Freudenberg, ‘Beyond Lawyers: Legal literacy for the future’ (2017) 45(5) Australian Business

Law Review 387.

Page 37 of 46

particularly because of their exposure to many aspects of business operation including day-to-

day management, financial decisions, compliance obligations and cash-flow managements. It

was observed that previous studies indicate a potential gap in tax knowledge by small

business operators but that this research was either historical or not empirical. The paper then

outlined the methodology of the current study involving focus groups and a survey.

The results illustrated the strong tax literacy and tax confidence of small business operators,

but noted areas of weaknesses. This was compared to previously reported findings of tax

literacy and tax confidence in the whole survey sample. Also specific aspects of complying

with the GST were explored, as well as tax depreciation knowledge and confidence. There

was strong evidence that changes in tax law adversely affects small business owner’s

confidence in how the tax system applies to their business which further supports the earlier

research presented in the literature. The results supported a strong compliance attitude,

although the study did illustrate how there could be unintentional non-compliance due to

incorrect tax law knowledge about record requirements.

The greater our understanding of small businesses and their tax law literacy, the greater is our

potential to assist this important sector of the economy. With this understanding we can build

upon their strong tax law literacy, including how they can best source advice to meet their

obligations; as well as to realise the benefits that can materialise through tax compliance,

especially GST record keeping and managerial benefits.

With enhanced tax literacy, small businesses should be able to ensure that they meet their

obligations which should decrease the potential for financial penalties, as well as ensure that

they claim all of their entitled deductions and offsets. If this can be realised then this is better

for all stakeholders.

Page 38 of 46

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Paul Nzioki and Rawlings Osebe, ‘An analysis of factors affecting tax compliance in the real

estate sector in Kenya: a case study of real estate owners in Nakuru town, Kenya’

(2014) 5(11) Research Journal of Finance and Accounting 1.

Michael J. Peel, Nicholas Wilson and Carole Howorth, ‘Late payment and credit

management in the small firm sector: some empirical evidence’ (2000) 18(2)

International Small Business Journal 17.

A. Mitchell Polinsky and Steven Shavell, ‘On Offense History and the Theory of Deterrence’

(1998) 18 International Review of Law and Economics 305.

A. Mitchell Polinsky and Steven Shavell ‘On the Disutility and Discounting of Imprisonment

and the Theory of Deterrence’ (1999) 8 Journal of Legal Studies 1.

Jeff Pope, ‘The Compliance Costs of Taxation in Australia and Tax Simplification: The

Issues’, (1993) 18(1) Australian Journal of Management 69.

Page 45 of 46

Dina Pomeranz, ‘No Taxation without Information: Deterrence and Self-Enforcement in the

Value Added Tax’ (2015) 105(8) The American Economic Review 2539.

Natrah Saad, ‘Tax Knowledge, Tax Complexity and Tax Compliance: Taxpayers’ View’

(2014) 109 Procedia-Social and Behavioral Sciences 1069

Cedric Sanford, Michael Godwin and Peter Hardwick, Administrative and Compliance Costs

of Taxation (Fiscal Publications , 1989).

Cedric Sandford, Michael Godwin, Peter Hardwick and Ian Butterworth, Costs and Benefits

of VAT, (Heinemann Educational Books Ltd, 1981).

The Social Research Centre, ANZ Survey of Adult financial literacy in Australia (Australia

and New Zealand Banking Group Limited, 2015).

Artur Swistak, ‘Tax Penalties in SME tax compliance’ (2016) 40(1) Financial Theory and

Practice 129

Binh Tran-Nam, ‘Tax compliance costs methodology – a research agenda for the future’ in

Chris Evans, Jeffrey Pope and John Hasseldine (eds), Tax Compliance Costs: A

Festschrift for Cedric Sandford (Prospect, 2001) 51.

UNSW and Chartered Accountants of Australia and New Zealand. Tax Complexity Research

Project, (UNSW, 2014).

Ian G. Wallschutzky and Brian Gibson, ‘Small business cost of tax compliance’ (1993) 10(4)

Australian Tax Forum 511.

Colin C. Williams, Confronting the Shadow Economy: Evaluating Tax Compliance and

Behaviour Policies (Edward Elgar Publishing, 2014).

Andrew Worthington, The distribution of financial literacy in Australia (No. 185) (School of

Economics and Finance, Queensland University of Technology, 2004).

Page 46 of 46

SUSTAINABILITY, CITIES AND SUBNATIONAL TAXATION: AN

ANALYSIS OF AUCKLAND AND BRISBANE

JONATHAN BARRETT*

Abstract

Treaties on environmental sustainability are concluded between nation states but, faced

with the domestic political realities of taxing or otherwise acting against the short-term

interests of voters, national governments often engage unwillingly with their

international obligations. The Trump administration’s resiling from the Paris Agreement

on climate change is an egregious example of flouting of national obligations but

Australia and New Zealand have also been slow to give effect to their promises to reduce

carbon omissions. Conversely, political subdivisions, including cities, can make their

own distinct contributions to sustainability through various measures, including taxes.

Megacities, such as London and Sydney, are sufficiently large to have the potential to

engage with climate change in ways comparable to many countries. Smaller cities,

including Auckland and Brisbane, can also make a contribution to sustainability.

Focusing on the use of subnational taxes, this article considers whether, in practice, they

do.

1 Introduction

Grand undertakings on environmental sustainability are negotiated and made between nation

states,1 but, in practice, countries may engage unwillingly with their treaty obligations. The

political realities of curbing the emissions of vocal domestic interest groups commonly

impact on implementation.2 The Trump administration’s withdrawal from the Paris

Dr Jonathan Barrett is a Senior Lecturer in Taxation and Commercial Law at the School of Accounting

and Commercial Law, Victoria University of Wellington, PO Box 600, Wellington 6140, New

Zealand. Email: Jonathan.Barrett@vuw.ac.nz.

See, in particular, the United Nations Framework Convention on Climate Change, opened for signature

3 June 1992, 1771 UNTS 107 (entered into force 21 March 1994).

See, for example, ‘Anti-carbon tax rally hits Australian parliament’ The Guardian (online), 16 August

2011 <https://www.theguardian.com/world/2011/aug/16/anti-carbon-tax-rally-australia>. Generally,

see Ian Bailey, ‘Global Commons, Domestic Decisions: The comparative Politics of Climate Change’

(2012) 6(2) Carbon and Climate Law Review 174.

Agreement on climate change3 presents an egregious example of shirking from international

obligations,4 but Australia and New Zealand have also been laggards in giving effect to their

promises on sustainability.5 Notwithstanding this apparent unwillingness to implement

effective measures at a national level, political subdivisions,6 including cities,7 can make their

own distinct contributions to sustainability through initiatives which included green taxes.

The 1972 United Nations Conference on the Human Environment was the first attempt to

coordinate worldwide action to combat environmental degradation.8 From this starting point,

the role of cities has been considered crucial. Thus principle 15 of the conference report

provides: ‘Planning must be applied to human settlements and urbanization with a view to

avoiding adverse effects on the environment and obtaining maximum social economic and

environmental benefits for all.’9 The United Nations Conference on Environment and

Development was convened in 1989,10 and the 1992 United Nations Conference on

Environment and Development (‘UNCED’),11 which led to the adoption of Agenda 21.12 As

Paris Agreement, opened for signature 22 April 2016, [UNTS number not available] (entered into force

4 November 2016).

See, for example, Mythili Sampathkumar, ‘The US president wants to ‘renegotiate’ a more ‘fair’ deal

for

the

US’

The

Independent

(online),

June

2017

<http://www.independent.co.uk/news/world/americas/us-politics/trump-paris-agreement-climate-

change-withdrawal-latest-news-updates-global-warming-deal-a7768116.html>.

See generally Alexander Gillespie and William CG Burns (eds), Climate Change in the South Pacific:

Impacts and Responses in Australia, New Zealand, and Small Island States (Kluwer Academic, 2000).

On the variance between United States policies at federal and state levels, see Robert H Frank, ‘Federal

Policy Will Shift. Not All States Will Shift With It’, The New York Times (online), 20 January 2017.

(Exceptionally long URLs for sources, such as those of The New York Times, have been omitted from

this article.) On the benefits to be gained by regions and cities pursuing green energy, see Stuart A

Thompson and Vikas Bajaj, ‘The Green Energy Revolution Will Happen Without Trump’ The New

York Times (online), 20 June 2017.

See Climate Mayors, Cities adopt the Paris Climate Agreement (2017) <http://climatemayors.org/> .

Held at Stockholm, 5 to 16 June 1972.

Report of the United Nations Conference on the Human Environment (United Nations, 1972) 5

<http://www.un-documents.net/aconf48-14r1.pdf> .

GA res 44/228 of 22 December 1989.

Held at Rio de Janeiro, 3 to 14 June 1992.

Stephen Knight observes, ‘UNCED recognised local government as a major contributor to

this “bottom-up” blueprint for sustainable development’.13 Programme areas for Agenda 21

include promoting sustainable land-use planning and management,14 and energy and transport

systems.15 Seeking to promote community-level observance of Agenda 21, ‘Local Agenda 21

is a process which facilitates sustainable development at community level. It is an approach

based on participation which respects the social, cultural, economic and environmental needs

of the present and future citizens of a community in all its diversity and which relates that

community and its future to the regional, national and international community of which it is

a part.’16 The growing importance of local government to environmental protection was

further recognised by Habitat II,17 when ‘participating nations made a commitment to the

objective of decentralising both authority and resources’.18

Most recently, through Habitat III,19 United Nations members have recognised ‘the power of

cities and towns, which will constitute up to 70 per cent of the world population by 2050, to

United Nations Conference on Environment and Development. As adopted by the Plenary in Rio de

Janeiro, 14 June, 1992 (‘Agenda 21’).

Stephen Knight, ‘Agenda 21 in New Zealand: Not Dead, Just Resting’ (2000) 7(4) Australian Journal

of Environmental Management 213, 213. See also Valerie Kupke, ‘Local Agenda 21: Local Councils

Managing For The Future’ (1996) 14(3) Urban Policy and Research 183.

Agenda 21, above n 12, [7.5.c.].

Ibid, [7.5.e.]

Ian Douglas and Philip James, Urban Ecology: An Introduction (Routledge, 2015) 342.

United Conference on Human Settlements, held in Istanbul, June 1996. The first such conference,

Habitat (later Habitat I), was held in Vancouver from 31 May to 11 June 1976 and led to The

Vancouver

Declaration

Human

Settlements

<https://unhabitat.org/wp-

content/uploads/2014/07/The_Vancouver_Declaration_19761.pdf>.

David Mercer and Benjamin Jotkowitz, ‘Local Agenda 21 and Barriers to Sustainability at the Local

Government Level in Victoria, Australia’ (2000) 31(2) Australia Geographer 163, 163.

United Nations, Habitat III New Urban Agenda, Quito Declaration on Sustainable Cities and Human

Settlements for Us All (2016) <http://habitat3.org/wp-content/uploads/Habitat-III-New-Urban-Agenda-

10-September-2016.pdf>.

be the engine for sustainable growth in the future’.20 C40 megacities,21 which include London

and Sydney,22 are sufficiently large to have the capacity to engage with climate change in

ways comparable to many countries.23 Smaller cities, such as Auckland and Brisbane, can

also make a contribution to sustainability through measures which include green taxes. But

do they?

This article uses the examples of Brisbane and Auckland to consider the contribution cities,

smaller than megacities, might make to sustainability, in particular, through local taxation.

Auckland and Brisbane are plausible comparators. Both promote themselves as sustainable

cities. In addition to having similarly-sized populations,24 the cities unusually have a unitary

council governance structure, but are limited in their scope of action by their constitutional

status in centralised British heritage countries. The article is limited to a consideration of

factors which are plausibly within the control of a city authority. Electricity generation,

which is typically produced and distributed at a state or national level, is one of the greatest

contributors to greenhouse gases worldwide25 but largely lies beyond the control of local

UN conference agrees new urban development agenda creating sustainable, equitable cities for all

(2016)

<http://www.un.org/sustainabledevelopment/blog/2016/10/un-conference-agrees-new-urban-

development-agenda-creating-sustainable-equitable-cities-for-all/>.

From the perspective of C40 Cities, a ‘Megacity’ has a population in excess of three million; a

metropolitan area population in excess of 10 million; or has a GDP in the top 25 for cities worldwide.

See C40 Announces New Guidelines for Membership Categories (2012) <http://c40-production-

images.s3.amazonaws.com/press_releases/images/25_C40_20Guidelines_20FINAL_2011.14.12.origin

al.pdf?1388095701>.

See Climate Action in Megacities 3.0 (2015) <http://cam3.c40.org/#/main/home> .

See generally Ernest J Yanarella and Richard S Levine, The City as Fulcrum of Global Sustainability

(Anthem Press, 2011).

The population of Auckland was approximately 1.415 million at the time of the 2013 census. See

Auckland

Council,

Census

Auckland

(2017)

<http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/reports/Pages/censusinaucklandhome.a

spx>. In 2016, 1.131 million people lived in Brisbane (local government area). See 2016 Census

QuickFacts

(2017)

<http://www.censusdata.abs.gov.au/census_services/getproduct/census/2016/quickstat/LGA31000?ope

ndocument>.

See Sources of Greenhouse Gas Emissions (2017) <https://www.epa.gov/ghgemissions/sources-

greenhouse-gas-emissions>.

authorities. Likewise, roading policy, which is the other principal cause of atmospheric

carbon emission,26 is often set at a national or state level. Nevertheless, a city can usually

affect how and how far people travel within it. Furthermore, urban sustainability

considerations can be reduced to the population density of a city, and that is a matter over

which cities can exercise considerable influence.

After outlining the particular concept of sustainability used in this article, subnational taxes

which may promote that goal are identified. The extent to which Brisbane and Auckland have

used such taxes is then considered. Vienna is then introduced as a third comparator because it

is a similarly-sized city to Auckland and Brisbane, and is commonly cited as a model of a

sustainable city. Conclusions are then drawn.

2 Sustainability, sustainable cities, and sustainability-promoting taxes

This part of the article seeks to answer three basic questions, the answers to which will

inform the discussion that follows, namely: what is meant by the contestable term

‘sustainability’; what is a ‘sustainable city’; and which subnational taxes promote

sustainability and sustainable cities?

2.1 What is ‘sustainability’?

Sustainability is commonly approached in a trifurcate way: from the perspectives of people

(social sustainability), profit (economic sustainability) and planet (environment

sustainability).27 Habitat III casts a wide net for urban sustainability, and takes into account

‘challenges in terms of housing, infrastructure, basic services, food security, health,

education, decent jobs, safety, and natural resources among others’.28 However, in the

interests of analytical manageability, this article focuses on the concept of environmental

sustainability enunciated in the United Nations’ 1987 Brundtland Report,29 although it is

recognised that, if cities are to survive, they must also meet people’s social needs and be

Ibid.

See, for example, Kelsey Nowakowski, ‘Sustaining Our Cities’ (2017) 231(5) National Geographic 9.

Habitat III, above n 19, [2].

United Nations, Report of the World Commission on Environment and Development: Our Common

Future (1987) (‘ Brundtland Report’) <http://www.un-documents.net/wced-ocf.htm> .

economically resilient.30 The Brundtland Report defines ‘sustainability’ as ‘[d]evelopment

that meets the needs of the present generation without compromising the ability of future

generations to meet their own needs’.31 Australia’s National Strategy for Ecologically

Sustainable Development similarly defines ‘ecologically sustainable development’ (ESD) as

‘using, conserving and enhancing the community’s resources so that ecological processes, on

which life depends, are maintained, and the total quality of life, now and in the future, can be

increased’.32 Sustainability, in this sense, concerns the just distribution of resources among

current and future generations.33 In short, one group in society, nation or generation should

not consume today or in the future an inequitable amount of non-renewable resources.34

2.2 What is a ‘sustainable city’?

Sustainability can be a slippery concept, especially when applied to cities. For Kim Dovey, it

‘is one of the great empty signifiers of our era; it is difficult to debate because no one is

suggesting an unsustainable city’.35 Nevertheless, urban planners and designers broadly agree

‘[t]he compact city – with development grouped around public transport, walking, and

‘Urban Resilience is the capacity of individuals, communities, institutions, businesses, and systems

within a city to survive, adapt, and grow no matter what kinds of chronic stresses and acute shocks they

experience.’

See

The

Resilience

Prospectus

<http://100resilientcities.org/wp-

content/uploads/2017/10/100RC-06LR.pdf>.

Neither Auckland nor Brisbane are members of the group of 100 Resilient Cities: see Our Cities (2017)

<http://www.100resilientcities.org/cities/> .

Brundtland Report, above n 29, chapter 2.

See

Australian

Government,

Ecologically

sustainable

development

<http://www.environment.gov.au/about-us/esd> .

Compare with the ‘deep ecology’ critique of Brundtlandian sustainability presented by Arne Naess and

others. See, for example, Arne Naess, Ecology, Community and Lifestyle: Outline of an Ecosophy

(David Rothenberg, trans, Cambridge University Press, 1989) [trans of: Okologi, Samfunn og Livsstil

(first published 1973)].

What intergenerational equity in distribution of non-renewable resources might look like in practice is

a matter for a debate which lies beyond the scope of this article. For a discussion of the major relevant

issues, see Emilio Padilla, ‘Intergenerational Equity and Sustainability’ (2002) 41 Ecological

Economics 69; Catherine J Iorns Magallanes, ‘Foreword: New Thinking on Sustainability’ (2015) 13

New Zealand Journal of Public & International Law 1.

Kim Dovey, Urban Design Thinking: A Conceptual Toolkit (Bloomsbury Academic, 2016) 253.

cycling – is the only environmentally sustainable form of city’.36 Its counter image is ‘the

profoundly unsustainable ... city of low-density suburbs, freeways and shopping malls with

almost universal car ownership and free parking’.37 More specifically, Peter Newman and

Jeffrey Kenworthy identify the measures for a sustainable city as: ‘energy and air quality;

water, materials, and work; land, green spaces, and biodiversity; transportation; liveability,

human amenities, and health’.38

2.2.1 Which factors militate against sustainable cities?

According to Newman and Kenworthy, the automobile is ‘a fundamental cause of

unsustainability in cities’.39 Cars cause pollution in the inner-city and enable excessive spatial

growth, commonly known as ‘sprawl’.40 The principal determinant of a sustainable city is its

population density (number of people per square kilometre) – also referred to as ‘intensity’

and ‘compactness’. Despite anomalous examples of population intensification having

negative sustainability consequences,41 people in densely populated cities tend to walk, cycle

and use public transport more than people in less dense cities.42 Furthermore, ‘the carbon

emissions of different cities correlate strongly with relative densities’.43 Consequently, ‘any

Richard Rogers, ‘Foreword’ in Jan Gehl, Cities for People (Island Press, 2010) ix, ix.

Dovey, above n 35, 253.

Peter Newman and Jeffrey Kenworthy, Sustainability and Cities: Overcoming Automobile Dependence

(Island Press, 1999) 18.

Ibid, 64.

On sprawl as excessive spatial growth, see Jan K Brueckner and Hyun-A Kim, ‘Urban Sprawl and the

Property Tax’ (2003) 10 International Tax and Public Finance (2003) 5, 5. Pamela Blais describes

sprawl as ‘suburbanisation as market failure’. See Pamela Blais, Perverse Cities: Hidden Subsidies,

Wonky Policy and Urban Sprawl (UBC Press, 2010) 77. While urban planners and designers almost

universally oppose excessive suburbanisation, Wilbur Thompson argues use of the word ‘sprawl’ can

be ‘little more than a color word which reflects (betrays?) the speaker’s bias in favour of high

population density and heavy interpersonal interaction – his “urbanity”.’ See Wilbur Thompson, ‘The

City as a Distorted Price System’ in Richard T LeGates and Frederic Stout (eds) The City Reader

(Routledge, 4th ed, 2007) 266, 268.

See Elizabeth Burton, ‘The Compact City: Just or Just Compact? A Preliminary Analysis’ (2000)

37(11) Urban Studies 1969, 1974.

Rogers, above n 36, ix.

Dovey, above n 35, 254.

equitable global pact on climate change’ requires ‘transformational change in car-dependant

cities in order to reduce emissions to a small fraction of current levels’.44

2.2.2 Which factors shape sustainable cities?

Transportation priorities greatly determine the sustainability of a city.45 In broad terms, the

key issue is the extent to which automobile infrastructure is privileged relative to public

transport,46 cycling and walking. In the post-war period, following the lead of North

America,47 Australasian cities, including Auckland and Brisbane, were shaped by the

automobile. Graeme Davison uses Reyner Banham’s neologism ‘Autopia’ to describe these

cities.48 ‘Low-density housing became more feasible, and as a reaction to the industrial city,

town planners began separating residential and business sectors by zoning. This also helped

to increase journey distances. The city began to decentralize and disperse.’49 For Davison:50

Mass motorisation was a kind of Faustian bargain. It promised its followers much, but

the promises were often negated by unanticipated consequences in their fulfilment. By

attempting to universalise individual mobility the car created congestion. By building

freeways to bring communities closer together it often endangered the cohesion of the

communities themselves.

Other determinants of urban sustainability include economic priorities, in particular, ‘how

new suburban infrastructure enables greenfield growth to occur rather than redevelopment

Ibid.

See generally Jeffrey R Kenworthy, ‘The Eco-City: Ten Key Transport and Planning Dimensions for

Sustainable City Development’ (2006) 18(1) Environment and Urbanization 67.

Newman and Kenworthy, above n 38, 27.

Los Angeles and Houston are commonly considered to be the prime examples of the automobile-

centric city. See Edward Glaeser, Triumph of the City: How Our Greatest Invention Makes Us Richer,

Smarter, Greener, Healthier, and Happier (Penguin, 2012). Jane Jacobs is greatly credited with

preventing New York from going the same way. See Jane Jacobs, The Death and Life of Great

American Cities (Penguin Books, first published 1961, 1964).

‘Autopia’ was one of the four ecologies of Los Angeles Banham identified: see Reyner Banham, Los

Angeles: The Architecture of Four Ecologies (University of California Press, 2001). Like Utopia,

Autopia is both ideal and dystopic.

Newman and Kenworthy, above n 38, 33.

See Graeme Davison with Sheryll Yelland, Car Wars: How the Car Won our Hearts and Conquered

our Cities (Allen & Unwin, 2004) xii.

and renewal of present urban areas’.51 Banks’ lending practices may also be relevant, notably

their reported unwillingness to accept mortgages over small apartments.52 Furthermore,

cultural priorities may be important, especially perspectives on urban space.53 For example,

in Australasia, the suburban ideal of a quarter acre block is a persistent desideratum.54

Finally, ideology can affect urban compactness because house owner-occupancy is typically a

political priority in property-owning democracies,55 such as Australia and New Zealand.

2.3 Which taxes promote sustainable cities ?

To effectively promote sustainability in cities, policies should encourage compactness and

reduce car dependence.56 Compactness makes travel by foot, bicycle and public transport

more likely. However, if ‘increasing densities are not accompanied by reduced car

dependence, the result is an increase in congestion ... combined with the potential loss of

both public and private green space to subdivision and new construction’.57 Population

density has, then, qualitative as well as quantitative aspects. It is essential, for example, that

compact cities include attractive public spaces,58 and heritage buildings are preserved.59

Newman and Kenworthy, above n 38, 27.

See, for example, Bridget Carpenter, ‘Buyers boxed in by cautious banks unwilling to lend for studio

apartments’

The

Australian

(online),

March

2011

<http://www.theaustralian.com.au/news/nation/buyers-boxed-in-by-cautious-banks-unwilling-to-lend-

for-studio-apartments/news-story/f5ae553f9f859c65d52cc45cee370a96>.

Newman and Kenworthy, above n 38, 27.

See Jon Kellett, ‘The Australian quarter acre block: the death of a dream?’ (2011) 82(3) Town Planning

Review 263.

See, generally, Martin O’Neill and Thad Williamson (eds), Property-Owning Democracy: Rawls and

Beyond (Wiley, 2012).

See Jan Gehl, Cities for People (Island Press, 2010) 68.

Robin Kearns and Damian Collins, ‘Children in the intensifying city: Lessons from Auckland’s

walking school buses’ in Brendan Gleeson and Neil Sipe, Creating Child Friendly Cities: reinstating

kids in the city (Routledge, 2006) 105, 107.

See Gehl, above n 56, 68.

On the difficulties of preserving heritage buildings when cities densify, see Steven C Bourassa, ‘The

Political Economy of Land Value Taxation’ in Richard F Dye and Richard W England (eds), Land

Value Taxation: Theory, Evidence, and Practice (Lincoln Institute of Land Policy, 2009) 195, 196.

Various types of subnational taxes may promote compaction and discourage private car use

in the inner city. First, property taxes, which are levied on unimproved land value, rather than

capital value, are predicted to discourage sprawl.60 For followers of Henry George,61 it is

axiomatic that land taxes are a paragon of efficiency.62 Second, taxes can be used to increase

the price of private car use to compensate for externalities,63 and to negate perverse

subsidies.64 Third, congestion charges,65 punitive tolls for single occupancy vehicles,66 high

parking fees,67 and so forth, may be used to discourage private car use, to combat pollution

and reduce carbon emissions.68 Fourth, tax revenues, such as those from fuel taxes or tolls,69

may be hypothecated to fund public transport projects.70

3 Comparator Cities

See H Spencer Banzhaf and Nathan Lavery, ‘Can the Land Tax Help Curb Urban Sprawl? Evidence

from Growth Patterns in Pennsylvania’ (2010) 67 Journal of Urban Economics 169. See also Wallace

E Oates and Robert M Schwab, ‘The Impact of Urban Land Taxation: The Pittsburgh Experience’

(1997) 50(1) National Tax Journal 1; and Richard W Landholm, ‘Twenty-One Land Value Taxation

Questions and Answers’ (1972) 31(2) American Journal of Economics and Sociology 153.

See Henry George, Progress and Poverty; an Inquiry into the Cause of Industrial Depressions and of

Increase of Want with Increase of Wealth; the Remedy (The Modern Library, first published 1879,

1938,).

For the proposal of ‘tax incremental local transfers’ on overcoming NIMBYism in relation to efficient

use of urban land, see David Schleicher, ‘City Unplanning’ (2013) 122 Yale Law Journal 1670.

Newman and Kenworthy, above n 38, 184.

See, generally, Blais, above n 40.

Sean D Beevers and David C Carslaw, ‘The impact of congestion charging on vehicle emissions in

London’ (2005) 39 Atmospheric Environment 1, 4.

Newman and Kenworthy, above n 38, 205.

Ibid.

Blais, above n 40, 195.

A fuel levy is problematic. As wealthier people buy relatively expensive electric vehicles, a greater

burden of a fuel levy will fall on less wealthy drivers of petrol or diesel-powered vehicles. See Andrew

Ward, ‘Fuel duty taxes face £170billion hit from electric cars’ Financial Times (online), 26 June 2017

<https://www.ft.com/content/0dc01356-58b9-11e7-9bc8-8055f264aa8b?mhq5j=e7>.

Newman and Kenworthy, above n 38, 184.

This part of the article provides basic information about the comparator cities, starting with

an overview of their constitutional positions and taxing powers. It is then considered whether

Auckland and Brisbane, do in practice, use their taxing powers to promote sustainability.

3.1 Auckland

Auckland has been recognised as a C40 innovator city;71 the city is also a member of the

International Council for Local Environmental Initiatives which describes itself as ‘the

leading global network of more than 1,500 cities, towns and regions committed to building a

sustainable future’.72

3.1.1 Local government in New Zealand

New Zealand has two tiers of government, central and local.73 The latter has no formal

constitutional status.74 The Local Government Act 2002 (NZ) provides for territorial, regional

and unitary authorities. Most districts have a territorial authority and a regional authority.

Regional authorities perform cross boundary functions, such as those relating to the

environment, transport, and civil defence, whereas territorial authorities are concerned with

land use, public health, and planning. Regional and territorial authorities are functionally

distinguished; they are not in a hierarchical relationship. Knight observes ‘regional councils

tend to concentrate on biophysical issues while district and city councils see their roles in

land management, economic monitoring and social issues’.75

In Auckland, seven territorial authorities and the regional authority, were merged into a

unitary council, commonly referred to as the ‘super city’ in 2010.76 Local government is often

An ‘innovator city’ does not qualify as a Megacity ‘but have shown clear leadership in environmental

and climate change work’. See Auckland (2017) <http://www.c40.org/cities/auckland> .

Who we are <http://www.iclei.org/about/who-is-iclei.html> .

73

The short-lived provinces were disestablished in the interest of coherent central government. See

Michael King, The Penguin History of New Zealand (Penguin Books, 2003) 232.

74

See Geoffrey Palmer and Andrew Butler, A Constitution for Aotearoa New Zealand (Victoria

University Press, 2016) 188.

75

Stephen Knight, ‘Agenda 21 in New Zealand: Not Dead, Just Resting’ (2000) 7(4) Australian Journal

of Environmental Management 213, 219.

76

For a discussion of the formation of the super city and its ensuing problems, see Grant Duncan,

‘Auckland Council is it too big to last?’ (2016) 12(4) Policy Quarterly 54.

11

conceived as an instrument for achieving the goals of central government.77 There is no

tradition of devolution of power from central to local government, although, by virtue of its

relative size and economic significance,78 Auckland enjoys a degree of practical autonomy.

3.1.2 Local taxes

New Zealand is distinguished by the relative simplicity of its national tax system.79 This

aversion to fiscal complexity extends to local taxes. Since the country is a unitary state, no

state or provincial-level taxes exist. Stamp duty or other property transfer tax, which is often

the preserve of the intermediate level of government,80 is not levied.81

Rating, which is a tax on the value of real property, is the principal source of revenue for

local authorities in New Zealand.82 The rate is calculated by multiplying the property value

(land, capital or annual value) by a rating charge.83 Rates income is supplemented by

regulatory income and a petrol tax, grants from central government, interest and dividends,

77

See Philip McDermott, ‘A View from the Antipodes: Comparing the Lombard and New Zealand Ways

of Governance’ in Alessandro Colombo (ed), Subsidiarity Governance: Theoretical and Empirical

Models (Palgrave Macmillan, 2012) 73, 79.

78

For the year ending March 2016, Auckland contributed 37.2 percent of New Zealand’s gross domestic

product. See Stats NZ, Regional Gross Domestic Product: Year ended March 2016 (2017)

<http://www.stats.govt.nz/browse_for_stats/economic_indicators/NationalAccounts/RegionalGDP_HO

TPYeMar16.aspx>.

79

The PWC-World Bank survey of ease of paying taxes ranks New Zealand at 11th place, behind

countries such as Qatar which does not levy personal taxes. See PWC World Bank, Paying Taxes 2017

(2017) <https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-paying-taxes-2017.pdf>.

80

See, for example, the Duties Act 2001 (Qld).

81

Only an approved issuer levy remains of stamp duty: see Stamp and Cheque Duties Act 1971 (NZ) ss

86F-86L.

82

See Stats NZ, Government Finance Statistics (Local Government): Year ended June 2015 (17 June

2016)

<http://www.stats.govt.nz/browse_for_stats/government_finance/local_government/GovernmentFinanc

eStatisticsLocalGovernment_HOTPYeJun15.aspx >.

83

See Local Government (Rating) Act 2002 (NZ), s 13.

12

and sales and other operating income.84 Due to its significant investments,85 rates make up

only 42 per cent of Auckland’s operating income.86 Up to 30 per cent of rates revenue may be

derived from user charges related to property.87 A targeted water rate may also be charged.88

Local authorities may raise development contributions to recover a portion of capital costs

incurred when they provide infrastructure services for a new development.89 According to

Matt Adams and Ralph Chapman:90

roading and water supply costs fall with increasing density ... public services can be

delivered more efficiently (economically, socially and environmentally) at higher

density, up to a point. The overall picture of costs falling with density provides support to

those councils espousing and following ‘smart growth’ plans that seek to utilise the

excess capacity in existing infrastructure as opposed to continuing dispersed

84

Department

of

Internal

Affairs

Local,

Council

funding

(2011)

<http://www.localcouncils.govt.nz/lgip.nsf/wpg_url/About-Local-Government-Local-Government-In-

New-Zealand-Council-funding>.

85

The city’s principal investments are Ports of Auckland Ltd (100 per cent owned), Auckland

International Airport Ltd (22.4 per cent owned) and Auckland Film Studios Ltd (100 per cent owned).

See

Auckland

Council

Investments

Limited

(2017)

<http://www.aucklandcouncil.govt.nz/EN/AboutCouncil/representativesbodies/CCO/Pages/council_inv

estments.aspx>.

86

Suzanne

Tindal

and

John

Bishop,

Auckland

Council

– Investor Update (2016)

<http://www.aucklandcouncil.govt.nz/EN/AboutCouncil/businessandeconomy/Documents/investorupd

ateoctober2016.pdf>.

87

A charge can be a fixed amount, universal annual general charges (‘UAGC’) payable in respect of each

rateable unit, or a targeted rate for particular activities identified in a local authority’s funding impact

statement, such as waste removal: see Local Government (Rating) Act 2002 (NZ), s 15. For the 2017-

18 rating year, Auckland charges a flat UAGC of NZD404. See Auckland Council, Changes in

property rates for 2017-2018 rating year (2017) <https://beta.aucklandcouncil.govt.nz/property-rates-

valuations/Pages/changes-rates-bills-this-year.aspx>.

88

Local Government (Rating) Act 2002 (NZ), s 20. For details of volumetric water charges in Auckland

see

Watercare,

Domestic

water

and

wastewater

charges

and

IGC

(2017)

<https://www.watercare.co.nz/SiteCollectionDocuments/AllPDFs/Domestic_Charges.pdf>.

89

See Local Government Act 2002 (NZ), pt 8, subpt 5, as amended by the Local Government Act 2002

Amendment Act 2014 (NZ).

90

Matt Adams and Ralph Chapman, ‘Do Denser Urban Areas Save on Infrastructure? Evidence from

New Zealand territorial authorities’ (2016) 12(4) Policy Quarterly 63, 69.

13

development. It may also help underpin the setting of higher development contributions

for areas sprawling away from established infrastructure.

Auckland Council does not use development charges to direct sustainable outcomes, such as

intensified development, rather these levies are used ‘to recover from those persons

undertaking development a fair, equitable, and proportionate portion of the total cost of

capital expenditure necessary to service growth over the long term’.91

3.1.3 A missed opportunity for a sustainable Auckland

Auckland faces the natural disadvantage of its location on a narrow isthmus which

encourages an elongated, linear urban footprint. Yet, in the 1930s, the city was planned to be

a compact urban centre, served by electrified rail links. The émigré Austrian architect and

designer, Ernst Plischke,92 strongly influenced this plan ‘for a more geographically compact

and intensively settled Auckland, bound together by a cheap and efficient public

transportation network’.93 According to Chris Trotter, the plan was ‘deliberately scrapped by

the National Party’ after the Second World War.94 Trotter argues:95

When the post-war development scheme diverged from earlier models was in its

preference for highways and motorways over railways. The private automobile, not the

electrified rail unit, would provide the principal mode of transportation in the new sub-

urbanised society, which a new breed of housing entrepreneur was fast bringing to life.

91

See

Auckland

Council,

Financial

Policies:

Contributions

Policy

(2015)

2

<http://www.aucklandcouncil.govt.nz/EN/ratesbuildingproperty/developmentfinancialcontributions/Do

cuments/2015contributionpolicy.pdf> (emphasis added).

92

See Linda Tyler, Plischke, Ernst Anton, Te Ara - the Encyclopedia of New Zealand (2007)

<https://teara.govt.nz/en/biographies/5p31/plischke-ernst-anton>.

93

Chris Trotter, No Left Turn: The Distortion of New Zealand’s History by Greed, Bigotry and Right-

Wing Politics (Random House New Zealand, 2007) 205. Chris Harris’s research provides the basis for

Trotter’s analysis. See, for example, Chris Harris, ‘Lost City: Forgotten Plans for an Alternative

Auckland’ (Paper presented at the 2nd International Conference on Sustainability Engineering and

Science,

Auckland,

February

2007)

<http://www.thesustainabilitysociety.org.nz/conference/2007/papers/HARRIS-Lost%20City.pdf> .

94

Trotter, above n 93, 205. The Town and Country Planning Act 1926 (NZ), which applied a 50 per cent

betterment tax on the sale of land-holdings adjoining urban boundaries, was abolished by the National

government (1949-57).

95

Ibid, 218.

14

Today, Auckland has ‘a high level of car dependence, and underdeveloped public transport

system and residential intensification’.96 In Trotter’s words, it is an ‘anarchic, automobile-

inspired, socially-dislocated sprawl’.97 To a degree, urban planners are seeking to remodel the

city in ways resembling Plitschke’s abandoned blueprint.98 But, as Robin Kearns and Damian

Collins observe, ‘the likelihood of truly de-prioritizing motor vehicles in our cities remains

slim. The pro-car lobby maintains a firm grip on most city planning processes including

Auckland’s’.99

3.1.4 Use of taxes

Before the amalgamation of the seven councils to form the super city, only Franklin District

Council used capital value as its rating base;100 Auckland City Council and Manukau City

Council used annual value;101 whereas the majority (Northshore City Council, Papakura

District Council, Rodney District Council and Waitakere District Council) used land value.102

The merged council adopted capital value as its rating base. A capital base may make sense if

the focus is on population, rather than efficient land use.103 Nevertheless, the retreat from

land value for the majority of the city’s councils would be seen by Georgists,104 at least, as a

lost opportunity to encourage densification.

Beyond rating, Auckland has no other taxing powers and central government, which has been

traditionally reluctant to devolve fiscal powers to local government,105 may not be willing to

96

Kearns and Collins, above n 57, 106.

97

Trotter, above n 93, 205.

98

See

Auckland

Council,

The

Auckland

Plan

(2017)

[564]

<http://theplan.theaucklandplan.govt.nz/urban-auckland/> .

99

Kearns and Collins, above n 57, 117.

100

See General revaluation 2011 <https://www.parliament.nz/resource/0000212250>.

101

Ibid.

102

Ibid.

103

Blais, above n 40, 194.

104

Rolland O’Regan claims land based rating was established in New Zealand before George was known

in the country. See Rolland O’Regan, Rating in New Zealand (Baranduin Publishers, 2nd ed, 1985)

105

See Local Government Rates Inquiry, Funding Local Government: Report of the Local Government

Rates Inquiry (Department of Internal Affairs, 2007) chapter 11.

15

grant more extensive powers. Despite the political implausibility of the proposal, Len Brown,

the first mayor of the super city (2010-16), called for a local income tax to alleviate the

burden on asset rich, income poor ratepayers.106 Phil Goff, the current mayor, was rebuffed in

his proposal for local tourist levy but a form of tourist tax has been implemented by levying a

higher rate against hotels and motels than other commercial buildings.107 Since such

differentiation, based on ‘the use to which the land is put’, can bring some flexibility to the

rating system,108 policymakers could use the narrow range of fiscal tools at their disposal to

promote sustainability. For example, rating differentiation could be used to promote

sustainable use of land, for example, by charging rates based on population density. Auckland

does not do this.

As noted, Auckland charges for water on a volumetric basis. Otherwise, taxes appear to be

seen purely as revenue raising devices, rather than instruments for modifying behaviour or to

prompt sustainable outcomes. However, at the time of writing, a congestion charge is under

consideration for Auckland but whether central government will grant the council requisite

powers is unclear.109 Congestion has a major impact on Aucklanders’ productivity and is

estimated to cost almost NZD 2 billion a year.110 Beyond economic benefits, decongestion

106

See ‘Brown’s bold tax plan’ North Shore Times (online), 6 March 2014

<http://www.stuff.co.nz/national/politics/9796451/Browns-bold-tax-plan> .

107

Bernard Orsman, ‘Goff’s ‘bed tax’ for Auckland hotels approved’ The New Zealand Herald (online), 1

June 2017 <http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1 & objectid=11867655> .

108

See Local Government (Rating) Act 2002 (NZ), s 14 and sch 2, cl 1.

109

Isaac Davison, ‘Road tolls for Auckland a step closer, as Govt sets up team to investigate congestion

charging’

The

New

Zealand

Herald

(online),

4

June

2017

<http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1 & objectid=11869538> . Auckland has also

requested a regional fuel levy, which was rejected by the National-led government (2008-17) but is

likely to be more plausible under a Labour-led government.

110

See Christina Leung, Killian Destremau, Daniel Pamudi and Michael Bealing, Benefits from Auckland

road

decongestion

(2017)

<https://www.ema.co.nz/resources/EMA%20Reports%20and%20Documents/Advocacy/Submissions/

NZIER%20report%20on%20Auckland%20Benefits%20of%20Decongestion.pdf>.

16

should reduce the city’s carbon emissions.111 A congestion charge would also demonstrate a

willingness to use fiscal tools to direct people’s behaviour towards sustainable outcomes.

3.2 Brisbane

In terms of section 70 of the Constitution of Queensland 2001, ‘[t]here must be a system of

local government in Queensland’. This requirement, including taxing powers, is fleshed out

in the Local Government Act 1993 (Qld). Unlike Melbourne and Sydney, which are

comprised of tens of city councils, Brisbane has a single city council. This unitary structure

provided the model for the Auckland ‘super city’.112

David Mercer and Benjamin Jotkowitz observe ‘while local government is undoubtedly of

growing importance, it can also be extremely vulnerable to radical change ‘from without’ if,

for example, a state government wishes to reshape local authorities in such a way as to erode

local democracy and make local government administrations accountable only to the higher

level of government’.113

3.2.1 Local taxes

Since the structure of local government in both Australia and New Zealand follows a British-

heritage model, rating is Brisbane’s principal source of revenue, as it is for Auckland. Rates

and utility charges constituted 44.8 percent of total revenue in the year 2015-16.114 Other

significant sources of revenue were: donations, contributions and subsidies (13 percent); fees

and charges (11.9 percent); and TransLink Transport Authority (14.7 percent).115 Unlike

Auckland, the rates base for Brisbane is land value.116

3.2.2 Autotopia to carbon neutrality

111

See Ian Wallis and David Lupton, The Costs of Congestion Reappraised (Research Report 489, New

Zealand Transport Agency, 2013).

112

See Clare Mouat and Jago Dodson, ‘Reviewing the Auckland ‘super city’: towards an ongoing agenda

for evaluating super city governance’ (2013) 50(2) Australian Planner 138.

113

Mercer and Jotkowitz, above n 18, 163.

114

Brisbane City Council, Annual Report 2015-16 (2016) 110.

115

Ibid.

116

Brisbane City Council, How rates are calculated (2017) <https://www.brisbane.qld.gov.au/about-

council/council-information-rates/rates-payments/how-rates-are-calculated>.

17

Brisbane’s post-war development can be seen as a story of seeking Autopia but realising

‘Austerica’.117 John Nightingale observes: ‘The car became a virtual political slogan ... in the

worker’s paradise of the 1960s a worker had a right to his own home and his own car to get to

work. And so the trams and trolley buses had to go.’118 That legacy remains. According to

Nightingale:119

improvements to public transport and cycling networks are of marginal significance to

the future of Brisbane as an accessible city. Despite the large amount of money being

spent, it will not change Brisbane’s almost total dependence on the car. Even if the cost

of car ownership and use increases enormously, because the price elasticity of demand

for convenient private transport is tiny, and the income elasticity substantial, little change

will occur in overall levels of demand for road space for private transport.

Today Brisbane is considered to be a liveable, world city but this has not always been so. In

the Joh Bjelke-Petersen era (1968-87), government was both conservative and corrupt.120 But,

according to Greg Clark:121

Brisbane is an example of a city that has been able to globalise with the help of a large

and financially astute city government, which has used the surplus from its recent

commodities boom to erect a more international model of economic development.

117

Robin Boyd coined the term ‘Austerica’ which ‘performed not a double, but a triple, word play:

‘Austerica’ was not just a hybrid American-Australianism, but a frenetic (hysterical) pursuit of what

was cheapest and nastiest in American culture (the austerity version)’. See Davison, above n 37, 80.

118

John Nightingale, ‘Brisbane: The 200 Kilometre City or Just Another Port Town’ (2006) 24(3) Urban

Policy and Research 409, 415. Generally, Nightingale presents a damning picture of urban planning in

Brisbane and its neighbouring coastal regions.

119

Ibid, 417-8.

120

On Bjelke-Petersen’s ‘crypto-fascist, bird-brained conservatism’, see Robert Foster, ‘Tales from Pig

City’

The

Monthly

(online),

September

2007

<https://www.themonthly.com.au/issue/2007/september/1188970325/robert-forster/tales-pig-city>. On

corruption, see Matthew Condon, ‘Sir Joh corrupt: late premier was to receive bribe for tower project’

The

Courier-Mail

(online),

19

September

2015

<http://www.couriermail.com.au/news/queensland/queensland-government/sir-joh-corrupt-late-

premier-was-to-receive-bribe-for-tower-project/news-story/566086d4f8aa50165cb3a4eb2c69d960>.

121

Greg Clark, ‘How cities took over the world: a history of globalisation spanning 4,000 years’ The

Guardian (online), 1 December 2016 <https://www.theguardian.com/cities/2016/dec/01/how-cities-

took-over-the-world-a-history-of-globalisation-spanning-4000-years>.

18

The Brisbane city council has pursued a wide range of joint ventures, sponsored business

conventions and sporting events, and convinced its state government to prioritise

Brisbane for road and rail infrastructure funding. It has also experimented with public-

private partnerships and toll roads, with some success.

These achievements indicate economic and social sustainability but Brisbane was also named

‘Australia’s Most Sustainable City in 2014 and 2016 at the Keep Australia Beautiful

Australian Sustainable Cities Awards’.122 Remarkably, the city council has become carbon-

neutral through efforts which include greening the city’s extensive bus fleet.123

3.2.3 Use of taxes

The Liberal National Party of Queensland (LNP)-governed council seems willing, then, to

use the city’s money to promote a ‘Clean, Green and WaterSmart City’124 but may be

ideologically opposed to directing individuals’ behaviour through taxes. Brisbane Vision

2013,125 for example, includes no mention of compaction, densification or intensification.

Land value taxation is not portrayed as a tool for efficient land use. Furthermore, despite

predictions for massive increases of private vehicles on the city’s roads,126 the council has no

plans to introduce congestion charges.127

4 DISCUSSION

122

Brisbane

City

Council,

Brisbane.

Clean,

Green,

Sustainable

2017-2031

(2017)

<https://www.brisbane.qld.gov.au/environment-waste/be-clean-green-brisbane/brisbane-clean-green-

sustainable-2017-2031>.

123

Brisbane

City

Council,

How

Brisbane

City

Council

went

carbon

neutral

(2017)

<https://www.citysmart.com.au/blog/brisbane-city-council-went-carbon-neutral/>.

124

Brisbane

City

Council,

Clean,

Green

and

WaterSmart

City

<https://www.brisbane.qld.gov.au/sites/default/files/4_clean_green_watersmart_city.pdf>.

125

Brisbane

City

Council,

Brisbane

Vision

2031

(2013)

<https://www.brisbane.qld.gov.au/sites/default/files/Brisbane_Vision_2031_full_document.pdf>.

126

See Department of Infrastructure and Regional Development, Traffic and congestion cost trends for

Australian capital cities (Bureau of Infrastructure, Transport and Regional Economics Information

Sheet 74) (2016) <https://bitre.gov.au/publications/2015/files/is_074.pdf>.

127

See Brisbane City Council, Reducing congestion (2016) <https://www.brisbane.qld.gov.au/traffic-

transport/reducing-congestion>.

19

This part of the article seeks to compare Auckland and Brisbane, with a particular emphasis

on population density, which, to reiterate, is commonly considered to be a proxy for

sustainability. Vienna is also introduced to the discussion because the city has ‘been

recognised as the city with the highest number of community, business, and environment

programs that have been recognised by the United Nations as good or best practice’.128

4.1 Comparing cities

Various attempts are made to compare and rank cities; some comparisons are more

scientifically rigorous than others.129 The widely publicised liveability rankings produced by

the Economist Intelligence Unit (EIU)130 and Mercer131 use a range of criteria but are likely

to be of particular interest to expatriate business executives or wealthy migrants.132

Notwithstanding the shortcomings of such rankings, liveable cities, such as Vienna, are often

also sustainable cities, particularly because they are compact and served by high quality

public transport services.

Arcadis and the Centre for Economic and Business Research (CEBR) have ranked various

cities, including Brisbane but not Auckland, based on social, economic and environmental

factors.133 Social sustainability considers ‘health, education, income inequality, work-life

balance, ratio of wage earners to dependents, crime, housing, and living costs’.134 Economic

sustainability relates to ‘[t]ransport infrastructure, ease of doing business, tourism, GDP per

capita, the city’s importance in global economic networks, Internet connectivity, and

128

Liam

Kavanagh,

Social

Sustainability

&

High

Density

Development

(2009)

28

<https://www.planning.org.au/documents/item/1177>.

129

Compare, for example, Saskia Sassen, Cities in a World Economy (Sage, 4th ed, 2012) 115-26 and

Monocle, Most liveable city, 2016: Tokyo (2016) <https://monocle.com/film/affairs/top-25-cities-

2016/>.

130

See ‘The world’s most liveable cities’, The Economist (online), 18 August 2016

<http://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-14> .

131

See

Mercer,

2016

Quality

of

Living

Rankings

(2016)

<https://www.imercer.com/content/mobility/quality-of-living-city-rankings.html#list>.

132

For a critique of such liveability measures, see Paul James, Belinda Young, Brendan Gleeson and John

Wiseman, ‘What actually is a good city?’, The Conversation (online), 12 July 2017.

133

See Nowakowski, above n 27, 9 .

134

Ibid .

20

employment rates’.135 Environmental sustainability concerns ‘[e]nergy consumption and

renewable energy share, waste management, green space, sanitation, water, greenhouse gas

emissions, natural catastrophe risk, and air pollution’.136

The highest rank for an Oceania city in any category of the Arcadis-CEBR survey is

Wellington, which was ranked sixth for environment but 28th overall. Canberra is ranked

highest overall for regional cities, at 18th place. Brisbane is ranked 30th overall, two places

below Sydney and two places above Melbourne. But, whereas Brisbane ranks highly for

social sustainability (21st), it is placed 41st for environment. For economic sustainability, it is

ranked 30th. As Brisbane’s overall position indicates, in these composite rankings, relatively

poor environmental sustainability can be compensated for by high social and economic

performance.

Table 1: Points of comparison between Auckland, Brisbane and Vienna137

City

Urban density Liveability

Sustainability

(people/km2)

Demographia138 Mercer

EIU

2015 Arcadis (planet)

2017

rank140

rank139

Vienna

3,900

1st

2nd

4th

135

Ibid .

136

Ibid .

137

Adapted from Kavanagh, above n 128, 18.

138

Demographia, World Urban Areas 13th Annual Edition (2017) <http://www.demographia.com/db-

worldua.pdf>.

139

Mercer,

Quality

of

Living

City

Rankings

(2017)

<https://www.imercer.com/content/mobility/rankings/d147852/index.html>.

140

‘Full ranking with rating and category breakdown’ Herald Sun (online), August 2015

<http://media.heraldsun.com.au/files/liveability.pdf> .

Auckland was ranked 8th in 2016 but Brisbane was not included in the survey: see ‘The world’s most liveable

cities’

The

Economist

(online),

18

August

2016

<http://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-14> .

21

Auckland

2,800

3rd

9th

No rank

Brisbane

1000

37th

18th

41st

In terms of planning and managing urban spatial development, Habitat III expects cities to

adhere to certain principles, including ‘compactness’ and ‘appropriate density and

connectivity’ in order ‘to prevent urban sprawl, to reduce mobility challenges and needs and

service costs per capita, and to harness density and economies of scale and agglomeration’.141

While being alert to the risk of reductionism, for cities in the advanced economies,142

population density may be used as a proxy for environmental sustainability. A comparison

between the populations of Auckland’s Statistical Urban Area and Brisbane’s Significant

Urban Area indicates 1200 people/km2 for Auckland and 420 people/km2 for Brisbane.143 The

Demographia survey, which is the best-known population density comparison, indicates far

greater densities for both cities. (Variations in densities usually arise from the different

denominators used.) Nevertheless, it is clear that, despite pockets of compactness,144 Brisbane

is significantly less dense than Auckland, which indicates a lower degree of sustainability.

Vienna is considered to be a ‘European best practice city’ for its public transport which is

heavily subsidised by government.145 Public transport also receives significant state support

in Brisbane, with the Queensland government recovering only around 24 per cent of public

141

Habitat III, above n 19, [98].

142

Kolkata was the lowest ranked city in the Arcadis-CEBR review but has a population density of 11,100

people per square kilometre, See Demographia, above n 138, 18.

143

Auckland

Council,

Measuring

Auckland’s

Population

Density

(2014)

12

<http://knowledgeauckland.org.nz/assets/publications/Measuring-Aucklands-Population-Density-

26052014-Complete.pdf>. The figures were based on the 2013 ABS census data and Stats NZ

estimates.

144

Inner-city areas, notably New Farm (6,500 people per square kilometre), Kangaroo Point (6,400) and

Highgate Hill (5,500) are far more intensely populated than the city overall. See Australian Bureau of

Statistics,

3218.0

–

Regional

Population

Growth,

Australia,

2014-15

<http://www.abs.gov.au/ausstats/abs@.nsf/Previousproducts/3218.0Main%20Features302014-

15?opendocument&tabname=Summary&prodno=3218.0&issue=2014-15&num=&view=>.

145

John Whitelegg, Quality of Life and Public Management: Redefining Development in the Local

Environment (Routledge, 2013) 135.

22

transit costs from fee paying users.146 However, while almost three-quarters of commuters in

Vienna use public transport,147 Brisbane’s public transport system is used by fewer than one-

fifth of commuters.148 Vienna’s compactness is its principal distinguishing feature relative to

Australasian cities. And so, while Brisbane has experienced greater densification in its central

areas, 53 per cent of growth between 2001 and 2011 was in outer city areas, thereby

‘signalling continuing pressures for cities to spread towards the urban fringe’.149 In Vienna,

the municipality builds 85 per cent of new housing, mostly eco-efficient apartment blocks,150

and so can fully coordinate densification with public transport.

4.2 Freedom to act

According to the Climate Leadership Group of the C40 Mega Cities network:151

Responding to the climate challenge demands new technologies, policies and

approaches. To deliver these cities must be able to innovate in seeking out resources, and

implementing new solutions. City governments may benefit from being empowered to:

set their own tax regime and spend that revenue freely; set up funds such as public

benefit funds to issue bonds; enter into financial arrangement with private sector

organisation; and procure services and solutions based on fitness for purpose as well as

cost.

Similarly, in terms of Habitat III, countries commit themselves to:152

146

Australian

Government,

Urban

public

transport:

updated

trend

(2014)

11

<https://bitre.gov.au/publications/2014/files/is_059.pdf> (‘BITRE’).

147

Feargus O’Sullivan, Breaking Down the Many Ways Europe's City-Dwellers Get to Work (18 October

2017)

<https://www.citylab.com/transportation/2017/10/riding-bikes-buses-trains-in-european-

cities/543141/>.

148

While the use of buses has increased considerably in recent years, in 2011 15.8 per cent of Brisbane’s

commuters used public transport, compared with 24.9 per cent of Sydney’s commuters. See BITRE,

***, 3.

149

Australian Government, above n 146, 2.

150

See

Green

Social

Housing

for

All-

Vienna

(AT)

(3

December

2013)

<http://www.buildup.eu/en/practices/cases/green-social-housing-all-vienna> .

151

Unlocking Climate Action in Mega Cities <http://www.c40.org/researches/unlocking-climate-action-in-

megacities> (emphasis added).

152

Habitat III, above n 19, [15](c)iv].

23

supporting effective, innovative, and sustainable financing frameworks and instruments,

enabling strengthened municipal finance and local fiscal systems in order to create,

sustain, and share the value generated by sustainable urban development in an inclusive

manner.

Since administrative boundaries, such as multiple councils within a city, can be expected to

hinder coherent sustainability measures, the unitary structures of Auckland and Brisbane

councils should provide advantages over multi-council cities. However, a more critical

consideration is that, relative to many OECD countries, devolution of functions and powers is

highly restricted under the British-heritage model of local government.153 As Douglas

Ashford observes, typically, ‘the locals have a degree of fiscal autonomy, commensurate with

their responsibility and political clout’.154 Both Brisbane and Auckland are constrained in

their ability to take decisive action by the superior tier or tiers of government, and their

limited fiscal powers. (In Austria, municipalities control 12 per cent of the country’s total tax

revenue.155 For New Zealand, the corresponding figure is 6.9 per cent,156 and, for Australia,

3.3 per cent.157) Australian and New Zealand cities are not only fettered in their ability to use

taxes to promote sustainability, they also seem reluctant to use the powers they do have to

direct sustainable behaviour.158

4.3 National Contexts

This article is about local government but note may be taken of national contexts in which

they operate. Three-quarters of New Zealand’s electricity is generated from renewable

153

See generally Jan Biela, Annika Hennl and André Kaiser, Policy Making in Multilevel Systems:

Federalism, Decentralisation, and Performance in the OECD Countries (ECPR Press, 2013).

154

Douglas E Ashford, ‘British Dogmatism and French Pragmatism Revisited’ in Colin Crouch and David

Marquand (eds), The New Centralism: Britain Out Of Step in Europe? (Basil Blackwell, 1989) 77, 88.

155

See Austria (2016) <https://www.oecd.org/regional/regional-policy/profile-Austria.pdf>.

156

See New Zealand (2016) <https://www.oecd.org/regional/regional-policy/profile-New-Zealand.pdf>.

157

See Australia (2016) <https://www.oecd.org/regional/regional-policy/profile-Australia.pdf>.

158

For instructive case studies of innovative fiscal measures at a local level from Asia, Europe and North

America, see AECOM, Detailed Case Studies of Selected Revenue Tools Final Report (2012)

<http://www.metrolinx.com/en/regionalplanning/funding/Detailed_Case_Studies_of_Selected_Revenu

e_Tools_EN.pdf>. To reiterate, this article does not consider all environmentally-friendly measures,

just densification and transport.

24

sources,159 although only 40 per cent of the country’s overall energy consumption is

sustainable.160 In contrast, just 14 percent of Australia’s electricity is generated renewably.161

Australia is one of the world’s highest per capita emitters of carbon dioxide – 16.3 tonnes in

2013, compared with 7.6 tonnes for New Zealand and 7.4 tonnes for Austria.162 Queensland

emits the most carbon of the states and territories, with stationary energy being the main

contributor, followed by transport.163 This preponderance of renewable electricity provides

Auckland with considerable advantages with regard to electric vehicles, private or public. In

contrast, Brisbane’s extensive electrified rail network is powered mostly by fossil fuels.

Environmental taxes as a share of GDP in 2014 were 2.89 per cent for Austria, 1.91 per cent

for Australia, and 1.35 per cent for New Zealand.164 As this last percentage indicates, New

Zealand manifests a particular aversion to green taxes. The Emissions Trading Scheme

(ETS) is the country’s principal policy response to climate change.165 However, ETS does not

include methane gas produced by sheep and cattle which ‘amounts to almost 1/3 of New

Zealand’s greenhouse gas emissions, and it is the largest contributor’.166 A waste disposal

159

Renewables

(2016)

<http://www.mbie.govt.nz/info-services/sectors-industries/energy/energy-data-

modelling/statistics/renewables>.

160

Renewable energy resources (2016) <https://www.eeca.govt.nz/energy-use-in-new-zealand/renewable-

energy-resources/>.

161

Australian Energy Update 2016 (2016) 3 <https://www.industry.gov.au/Office-of-the-Chief-

Economist/Publications/Documents/aes/2016-australian-energy-statistics.pdf>.

162

CO2

emissions

(metric

tons

per

capita)

(2017)

<http://data.worldbank.org/indicator/EN.ATM.CO2E.PC> .

163

Australian National Greenhouse Accounts: State and Territory Greenhouse Gas Inventories, 2015

(2017)

6

<http://www.environment.gov.au/system/files/resources/15d47b77-dee2-42c6-bf2e-

6d73e661f99a/files/state-inventory-2015.pdf>.

164

Environmental

taxation

(2015)

<http://www.oecd.org/env/tools-

evaluation/environmentaltaxation.htm>.

165

See About the New Zealand Emissions Trading Scheme <http://www.mfe.govt.nz/climate-

change/reducing-greenhouse-gas-emissions/about-nz-emissions-trading-scheme>.

166

Methane

Emissions

<http://www.landcareresearch.co.nz/science/greenhouse-gases/agricultural-

greenhouse-gases/methane-emissions>.

25

levy is payable167 and electric vehicles (EVs) are currently exempted from road user

charges.168 Otherwise, green taxes in New Zealand are distinguished by their absence. Fringe

benefit tax (FBT) on employer-provided cars does not cover externalities,169 whereas the

value of employer-supplied bicycles or subsidised public transport is taxable.170 A proposed

‘carpark tax’ would have included employer-provided parking in the Auckland CBD but was

abandoned.171

5 Conclusion

Cities have the capacity to contribute to combatting climate change. Indeed, Habitat III

expects them to play the principal role. But cities are, to an extent, hostages to or conversely

beneficiaries of their national circumstances. Both Brisbane and Auckland are limited in their

scope of action, including taxation, by their subordinate constitutional status. Despite its

remarkable achievement of carbon neutrality, Brisbane City Council operates in the context

of the highest carbon-emitting state of one of the world’s proportionately worst greenhouse

gas contributors. In contrast, Auckland indirectly benefits from New Zealand’s high levels of

renewable energy. Yet the country shies away from environmental taxes.

167

See Waste Minimisation Act 2008 (NZ) ss 41 and 86 and Waste Minimisation (Calculation and

Payment of Waste Disposal Levy) Regulations 2009 (SR 2009/144).

168

See Electric vehicles (2017) <http://www.transport.govt.nz/ourwork/climatechange/electric-vehicles/> .

169

See RA Scott, GV Currie and KJ Tivendale, Company Cars and Fringe Benefit Tax – Understanding

the Impacts on Strategic Transport Targets (Research Report 474, New Zealand Transport Agency,

2012).

170

Compare with Ireland, where FBT is based on carbon dioxide emissions, and bicycles and public

transport subsidies are tax-free or preferentially taxed. Taxation of benefits from employment (2017)

<http://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/taxation_of_benefits_from_em

ployment.html>.

171

The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill 64-1 (2012)

included a proposal to introduce fringe benefit tax on employer-sponsored parking in the Auckland and

Wellington central business districts. The Bill was withdrawn following focussed opposition in the

media. For a discussion, see Jonathan Barrett and John Veal, ‘Tax Rationality, Politics, and Media

Spin: A Case Study of the Failed ‘Car Park Tax’ Proposal’ (Centre for Accounting, Governance and

Taxation Research School of Accounting and Commercial Law Victoria University of Wellington

Working Paper No 102 May 2016).

26

The British-heritage model of centripetal government, which denies local authorities

extensive autonomy and taxing powers, obstructs Auckland and Brisbane from reaching their

full sustainability potential.172 But, even with the relatively narrow range of fiscal measures at

their disposal, neither city council seems prepared to use taxes to direct citizens’ behaviour

towards sustainable outcomes. Taxes alone cannot save the environment but as a component

of a suite of green measures, they may help to direct behaviour towards achieving the goals

of Brundtlandian distributive justice.

172

Mercer and Jotkowitz, above n 18, 163, observe: ‘If Australia is serious in its commitment to the

principles of Agenda 21 ... we should be seeing far better resourcing and constitutional recognition of

local government than is currently the case’.

27

Document Outline

Abstract Introduction Section Two Financial Literacy Tax Literacy Tax Confidence Section Three Small Businesses Issues Tax Compliance Issues Section Four Methodology Demographics: Stage 2 Section Five Results Stage One: Focus Groups Stage Two: Survey Tax Literacy Score Tax Confidence Score GST Business Operators Deductions Compliance attitude Overall comments Section Six Limitations and Future Research Conclusions Reference List

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