Department of Treasury

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Department of Treasury FinanceGST Reviews

Paul OBrien Partner, Indirect Tax 7 August 2001
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Overview

• GST is just a wash or is it?
• ATOs approach to GST reviews
• Managing a review
• Possible triggers
• Areas of potential focus
• Access powers
• Implications and conclusions

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GST Just a wash

• Mistaken belief that GST is Just a wash
• Need to look at the law as it applies to both
  parties separately
• Where GST charged in error, may not be able to
  claim ITC even if paid in good faith
• GST may not be a wash even for the ATO
• Services to non-resident
• Sale of going concern
• Barter transactions

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GST Just a wash Contd

• Transitional contracts
• GST charged and should not have been
• Exported services
• Division 81
• Financial supplies

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GST Just a wash Contd
1 GST not charged

• If supply is subject to GST but not charged, the
  ATO will seek 1/11th of 100 from the supplier.
  In this scenario, the supplier will be out of
  pocket if there is no recourse to the recipient
• The recipient is entitled to ask for a valid tax
  invoice for 100, to become entitled to an input
  tax credit (ITC ) 1/11th x 100.
• The ATO will not automatically grant an ITC to
  the recipient so it may be a windfall gain, not a
  wash for the ATO.

No GST
Supplier
wash for ATO
ATO
Pays 100
No ITC
Recipient
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GST Just a wash Contd
GST incorrectly charged
No GST

• If a supply is not taxable and GST is incorrectly
  charged, the recipient is not entitled to an
  input tax credit (ITC) and the supplier must seek
  a refund from the ATO to repay the recipient. If
  the refund is not paid to the recipient, the
  supplier will have issues with the ACCC as well
  as commercial and contractual issues.
• If GST is correctly charged, the supplier has a
  liability but the recipient may not be entitled
  to an ITC if requirements are not met e.g. Tax
  invoice requirements.
• In both cases GST is only a wash for the ATO.
• There is not even a wash for the ATO when the
  recipient does not receive an ITC for one of the
  following reasons
• Making input taxed supplies
• Invoice requirements are not being met or not
  supplied at all
• The recipient not being registered.

Supplier
wash Only for ATO
Not a wash for Supplier
ATO
Pays 110
No ITC
Recipient
Not a wash for recipient
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Setting the scene -State of the Legislation

• GST is much more complex than expected
• 700 pages of Legislation
• 800 pages of Explanatory Memoranda
• 44 final and 6 draft GST Rulings
• 14 GST Determinations
• 7 GST Bulletins

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ATOs approach

• To date
• visited approximately 20,000 taxpayers
• average visits 2-3 hours
• underpayments 500m
• overpayments (i.e., unclaimed ITCs) 350m
• Source Barrie Russell - ATO Head of GST
  compliance A-TAX Conference 22-24 April 2001

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ATOs approach (contd)

• Context of the compliance program
• Compliance objectives
• Elements
• the Taxpayers Charter
• ATO culture staff
• Cooperative Compliance Model

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ATOs approach (contd)

• Taxpayers Charter
• committed to fair treatment of all who deal with
  the ATO
• committed to informing you of your rights
• committed to treating complaints seriously
  learning
• ATO culture staff
• 60 of GST staff are new to ATO
• flexible and mobile

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ATOs approach (contd)

• Co-operative Compliance Model (CCM)

Active enforcement
Assisted self-regulation
Self-regulation and cooperation
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ATOs approach (contd)
1 Understanding business and the law

• The 5 processes of CCM

2 Assessing the risks
5 Reviewing and improving
3 Planning strategies
4 Implementing strategies
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Managing a GST review

• What will the ATO be looking for?
• BAS integrity
• BAS preparation methodology
• GST procedures manual
• adequately trained staff
• post implementation reviews undertaken
• transaction analysis

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Managing a GST review (contd)

• Suggested policy - prior to visit
• arrange single point of focus
• written agenda from ATO
• communicate with staff
• review audit trail
• set appropriate meetings
• agree protocol
• know your rights and obligations

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Managing a GST review (contd)

• Suggested policy - during visit
• go on as normal
• courteous
• resources
• provide reasonable assistance and facilities
• make available but control
• accommodate reasonable requests for information
• only provide the information requested

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Managing a GST review (contd)

• during visit (contd)
• document demands - unreasonable, ambiguous, etc
• material requests and answers to be in writing
• privileged documents
• maintain records of information provided
• seek professional advice where necessary

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Managing a GST review (contd)

• Suggested policy - following visit
• note areas of concern
• request post review report
• note suggestions
• consider implementation

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Possible Triggers for an ATO review

• errors, variances and comparisons in BAS
  information
• information from stakeholders, suppliers and
  customers
• investigation of industry sectors by the ATO and
  other government departments
• audits of suppliers and customers
• tax compliance history
• routine compliance profiling, including
  substantial refunds.

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Areas of potential focus

• Invalid documentation
• tax invoices, RCTIs, adjustment notes
• cancelled invoices instead of adjustment notes
• claim by correct entity
• petty cash claims
• Maximising credits/minimising GST liability
• timing of issuing invoice
• timing of invoice processing

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Areas of potential focus (contd)

• Misclassification of transactions
• lack of transaction analysis
• GST free supplies classified as taxable or the
  reverse
• Supplies made for nominal consideration
• Rates and Taxes
• GST on part/advance payments
• progressive/periodic supplies
• input taxed/out of scope

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Areas of potential focus (contd)

• Cost savings
• Australian Competition Consumer Commission
  (ACCC)
• methodologies in place to support pricing
  strategy
• Audit trails
• source documentation, GL entries, systems
  generated reports, BAS entries
• document the audit trail from source document
  through to the BAS

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Areas of potential focus (contd)

• BAS often completed incorrectly
• Interest income not included in G1 and G4
• GST remitted on interest income
• Interest expense not included in G11 and G14
• Contra/barter arrangements ignored
• Non-deductible expenses included in G11 but not
  included in G15
• Appropriations incorrectly included on BAS at G11
  and G15
• Appropriations incorrectly included on BAS at G1
  and G3
• Superannuation contributions incorrectly included
  on BAS at G11 and G15

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Areas of potential focus (contd)

• Inadequate training/policies and procedures
• GST knowledge dissipated
• reliance on key personnel
• policy and procedure manuals inadequate
• on-going training, formal training for new
  personnel
• Lack of attention from management
• after GST implementation

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Areas of potential focus (contd)

• Contracts with GST
• GST not considered or a last minute thought
• CPI changes
• issues with contracts - rent, services etc
• grandfathered supplies
• compile a register
• monitor the register

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Areas of potential focus (contd)

• GST and FBT
• confusion over interaction
• If an ITC entitlement exists higher gross up
  rate must be used irrespective of whether ITC
  claimed
• incorrect treatment of non-deductible expenses
• reimbursement of staff expenses

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Areas of potential focus (contd)

• Too much focus on net GST payment
• materiality checks should focus on actual GST
  liability on supplies and credits for
  acquisitions, rather than BAS net GST payments
• GST is not a wash

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Areas of potential focus (contd)

• Cross Border Transactions
• Reverse Charge rules
• Exported services
• Imports
• Supplies made in the transitional period
• Work-in-progress valuations at 1 July 2000 and
  validity of supporting progress claims or
  independent valuations

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Areas of potential focus (contd)

• Controls issues
• controls absent/lacking over production/reconcilia
  tion of BAS
• document controls
• Grants, gifts, donations
• ensure GST rules in relation to non-monetary
  consideration do not apply
• Division 81
• do not include on the BAS

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Areas of potential focus (contd)

• Adjustment events
• Identification of input tax credits where
  acquisitions are used to make input taxed
  supplies
• de minimus calculation
• document it.
• apportionment methodology
• Agency arrangements

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Areas of potential focus (contd)

• Non-monetary consideration
• provision of works by development company to
  local authority
• donations that are actually sponsorship
• gifts in return for specific services performed
• land/asset transfers for no monetary
  consideration but with binding conditions/obligati
  ons attached to transfer.

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Areas of potential focus (contd)

• Cash Flow
• net credit situation
• PAYG offsets
• Attribution rules
• cash received/paid vs invoice issued/received
• progress claims and payments since 1 July 2000
• do not include accruals on the BAS only actual
  supplies or acquisitions made

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Access powers

• Section 65 of the Tax Administration Act
• Section 65 gives the Commissioner access to
  documents and information to enable the
  Commissioner to apply an indirect tax law to
• Give the Commissioner any information he requires
• Attend and give evidence before the Commissioner
  or officer
• To produce any documents in the persons control

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Access powers (contd)

• Section 66 of the Tax Administration Act
• Access to premises so that an authorised officer
  may
• Enter and remain on any land or premises
• Have full and free access to any documents
• Inspect, examine, make copies of, documents
• Inspect, examine, analyse, take samples of goods
  or property
• Provide reasonable facilities and assistance

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Access powers (contd)

• ATO Officer to produce an authority
• Use of formal access powers only in certain
  circumstances
• Give reasonable notice
• Give opportunity to seek professional advice
• Give opportunity to claim LPP, although this
  would be unusual for Govt
• Records held by third parties
• Timing of access
• Obstructions to access

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Legal professional privilege

• Main principles
• LPP protects communication between a legal
  adviser and the client if they
• are confidential in character and
• were brought into existence for the dominant
  purpose of obtaining or giving legal advice or
  for use in litigation

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Conclusions

• Best form of preparation
• GST implementation project
• GST procedures manual
• ongoing staff training
• pre and post implementation reviews

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Conclusions (contd)

• Evolution of the legislation
• it will not become extinct
• it will become more complex
• it will be simplified
• and it will become more complex
• keep watching this space

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Questions
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