As most Australian companies focus on the health of their customers and staff at this critical time, it is important to not neglect the business side of things, especially GST.
Recently, the ATO provided an update on one of its GST assurance programs. While aimed at large public and multinational companies, the methodologies on how entities are selected and how it tailors its compliance approach provides insights for Small and Medium-sized Enterprises (SMEs) as well.
Under the program, the ATO notes that taxpayers are usually selected for review or compliance measures based on a range of risk factors. When it notifies taxpayers that a review is about to commence, there is time for the taxpayer to consider making voluntary disclosures of any tax concerns.
During the actual review, the ATO will be looking at the overall GST performance of the business, the type and size of business activities, GST risk management and governance, and any information from prior engagements including income tax dealings.
The purpose of the review is for the ATO to obtain assurance that the business has:
- appropriate GST risk and governance frameworks that are applied in practice;
- exhibit none of the risks identified in the market in general;
- appropriate transactions (ie new, large or atypical transactions); and
- correct GST treatment of various streams of economic activity.
Reviews conducted would be comprehensive and typically involve the previous complete financial year including details of systems and BAS walkthroughs. Data and transaction testing are expected to be conducted focusing on three consecutive BAS periods and also looking at tax controls.
What is perhaps the most interesting element in the ATO update on GST assurance is the development and testing of a GST analytical tool (GAT) to help it better understand why accounting and GST result vary and identify questionable areas. In essence, the GAT uses a standard method statement applying a top-down approach to identify and understand variances between accounting figures reported in audited financial statements and GST reported on the BAS.
At the end of a review, the ATO states that it will share its findings of identified GST risks, recommend specific actions and follow-up. However, in some instances, it says a different approach may be taken (ie audit).
How can an SME be ready for an ATO GST review?
In Mazars' experience, the ATO has learnt to quickly adapt its standard GST review methodology when looking at an SME. Where tax “controls” are minimal and GST “systems” are limited to the accounting package, SMEs can often demonstrate the absence of GST risks by ensuring the following practices are permanently in place:
- Reviewing bank statements to report income that is not generated through invoicing systems
- Where related entities are not in a GST Group, reporting GST on income and expenses between them that are processed via journal entries especially management fees, salary reimbursements and expense recoveries
- Every tax period, undertaking a simple reconciliation between the income reported in the GL/ trial balance and the GST reported in the GST account, and
- Reviewing the six largest acquisitions each tax period upon which GST credits are claimed. For each, ensure that a tax invoice has been obtained in the SME’s name and that the acquisition relates to taxable or GST-free supplies. In Mazars' experience, large spikes in GST credit claims are more likely to trigger an ATO review than a similar percentage increase in sales or GST liabilities.
Need to get your GST sorted?
For more information or for assistance managing GST please contact your usual Mazars advisor or alternatively one of our specialists:
Published: 2 September 2020
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