3 keys to improving the mental health of SMEs in financial distress

The mental health of small business owners is suffering amid the COVID-19 pandemic, but research linking financial wellbeing and poor tax health offers vital insights to improving the outlook for SMEs, says UNSW Business School's Ann Kayis-Kumar

Since the outbreak of coronavirus, the government has announced several stimulus and relief packages, designed to sustain small businesses through the pandemic and keep employees in work. But the government has also been adamant that such measures – including expanded eligibility for JobSeeker payments for sole traders, JobKeeper payments and greater leniency for insolvency and bankruptcy – are only temporary.

Many small businesses that were already financially fragile before COVID-19 and are now having to cope with the added stress of mass layoffs, closures and exceptional levels of uncertainty about the future. As a result, the outlook for SMEs across Australia is not good. What lies ahead is anyone’s guess, but there are some resources available to small business owners which can help minimise the mental health toll.

For example, while very little research has been conducted into the mental health impact of financial stress on SMEs, a current project run by the UNSW Health@Business Research Network aims to improve mental health outcomes for businesses in financial distress. The project brings together experts including the Black Dog Institute’s Mark Deady and UNSW Business School’s Ann Kayis-Kumar to help find solutions for SMEs struggling in the current economic climate, and their findings so far offer essential insights.

1. Understanding the outlook for SMEs in the current crisis

According to Mark Deady, a UNSW postdoctoral research fellow working within the Workplace Mental Health Research Program at the Black Dog Institute, the current pandemic and subsequent social and economic restrictions have placed incredible strain on many SMEs.

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

“Certainly these are unprecedented events, and it is important for businesses and individuals to be aware that the anxiety, stress and related emotional responses to these events are not only normal but very reasonable,” he adds.

With the end of some government support measures looming, the current economic environment is adding extra pressure on SMEs. “They’re going to be lying awake at night wondering what to do,” says Dr Kayis-Kumar, a Senior Lecturer in the School of Taxation & Business Law at UNSW Business School.

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

2. The link between tax and mental health

The UNSW Tax Clinic recently appeared before the House of Representatives Standing Committee on Tax and Revenue recommending to the government that Australia's National Tax Clinic Program be different in design compared to the US Low Income Taxpayer Clinics program. 

"Unlike the US program, which focuses on legal advice, our research shows that long-term overdue lodgements and debt collection issues face a significant proportion of financially vulnerable taxpayers in Australia. This means that for Australia's program to be best suited to the needs of vulnerable taxpayers, we need to adopt an interprofessional approach involving both lawyers and registered tax agents", explains Dr Kayis-Kumar.

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

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

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

“So far, the idea that tax and mental health can be connected has been an unfamiliar one,” continues Dr Kayis-Kumar. “Ours will be the first [project] of its kind, domestically and internationally, to track the mental health outcomes for people who are financially vulnerable in getting pro-bono tax advice. We already are tracking the mental health outcomes and the financial stress levels of these people at the point that they first see us.”

Professional advice for financially vulnerable people is a real pinch point, but without a qualified professional in their corner this could lead to issues as significant as bankruptcy. “A lot of the clients that we see have to choose between paying for food or paying for a registered agent – you can’t expect people to prioritise paying an agent,” she says.

But even if they could see someone, there is a genuine risk that an agent might not want to act for them. They may have such a significant debt that the agent may not be able to recover their due fees. “It’s these sorts of people for whom, even just a little bit of say a refund can have a life-changing impact,’ says Dr Kayis-Kumar. “And that’s something that’s not been fully appreciated in the literature, and it’s only just coming to light in the policymaking space.”

SMEs are struggling, not just from a financial perspective, but the flow-on impact from that onto mental health, and these issues are particularly relevant now. “It’s almost like we’re in the calm before the storm – thanks to the Government’s temporary COVID-related supports which have largely been very effective at cushioning the economic shock, but I do worry what we will see if and when these need to be removed,” says Dr Kayis-Kumar.

3. Increased reform, research and resources

First, there is a desperate need for reform. The government offers some COVID-19-specific support for small businesses, but the challenge with some of the support is that it requires cash flow to receive a tax break, notes Dr Kayis-Kumar. “So more reform needs to be done in this space, and more ways to cushion the impact that this is having on small business should be implemented until things return to some level of normality,” she says.

Similarly, there is a need for further research into the effects of financial distress on mental health. The connection that tax has with a lot of these big social impact social justice questions and problems has so far been under-explored – or not explored at all. “Mental health and financial distress and how that intersects with tax is something that I think we are the only ones exploring,” says Dr Kayis-Kumar. She says more research in this space would ensure evidence-based practices.

The compliance burden for small businesses is overwhelming, Dr Kayis-Kumar adds. The government has put the onus on being up-to-date with taxes on the individuals and small businesses. From a broader policy and revenue perspective, this means there is also a cost vs benefits question around income and tax revenue versus cost, healthcare, and social costs associated with poor mental health resulting from financial stress.

Finally, the Black Dog Institute offers a range of training options for organisations to improve individual and organisational resilience, team wellbeing, along with webinar and online/app-based evidence-based programs for enhancing wellbeing and preventing mental illness. “In partnership with the NSW Government, we are providing free mental health training to micro, small or medium-sized businesses (with 1-199 employees) across NSW,” adds Dr Deady.

For more information, please contact Ann Kayis-Kumar, Senior Lecturer and Tax Clinic Director at UNSW Business School. For more information on The Health@Business Research Network, a collaborative network to advance the knowledge and practice of business activities that enable health, healthcare, and effective health outcomes, please contact Gavin Schwarz.