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  • Risks and new measures

    We apply a risk-based approach to the effective administration of the GST system. Our approach considers the client experience, compliance and associated risks in terms of registration, lodgment, correct reporting and payment.

    In 2018–19, we brought a client focus to our GST risk management, to clearly articulate the critical GST risks in each client population. Viewing GST risks through a population lens has facilitated linking of risk across tax products, leading to a more holistic view of risk and joint ATO treatment approaches. Our risk management focus was on:

    • GST evasion
    • property
    • BAS correct reporting
    • international cross-border administration
    • financial services and insurance
    • the black economy.

    We understand the behavioural drivers of our risk events, and we have co-designed a range of tailored contemporary strategies to:

    • recognise clients doing the right thing (from minimal touch to high touch)
    • change the behaviours of those that do not do the right thing (by making it easier to get GST obligations right and hard not to).

    New measure

    The government reviewed a range of models for collecting GST on low value imported goods before adopting the vendor collection model. The vendor collection model is considered more cost effective than other models. It collects GST from operators of online marketplaces, rather than thousands of individual suppliers.

    We developed streamlined reporting processes and a simplified GST registration system to implement the measures.

    A comprehensive communications and client engagement campaign led to a high level of willing compliance from overseas businesses for both measures. While the rate of compliance is good, we are taking direct action whenever we receive intelligence about likely non-compliance. We also follow up with any overseas businesses we believe are not complying with their obligations.

    GST evasion

    The GST evasion risk is characterised by taxpayers attempting to gain financial benefit through deliberate non-compliance with their GST obligations. The population engaging in GST evasion is not static; it changes constantly in response to market drivers and opportunities that can be exploited.

    Our approach

    During 2018–19, a number of legislative reforms assisted in mitigating risk for GST evasion, including the collection of GST at property settlement. Commencing on 1 July 2018, the reforms mitigate the phoenix risk in the property industry, and reduce GST evasion by preventing property developers from avoiding their GST obligations when making certain supplies of new property and land subdivisions.

    A key focus has been on increasing our ability to harness intelligence, to identify people engaging in deliberate non-compliance behaviour and phoenix activities. We have continued to refine our data sets and automated risk models, to better detect and select taxpayers for treatment. The identified evasion risks are then treated through our audit and review program that aims to disrupt the behaviour. Where warranted, cases are referred for prosecution.

    In recent years, we have adopted a more holistic approach to dealing with concerted attacks on the GST system.

    For example, in August 2018, we completed a coordinated strike on a group of tax agents suspected of facilitating phoenix activities and avoidance of tax (including GST) in the Melbourne and Shepparton areas (Victoria). Our approach achieved widespread positive media coverage that supported our objective to inform the community of the ATO’s work to reduce tax crime and dissuade others from engaging in such behaviour.

    As well as improving detection methods, technological advances continue to provide opportunities for those who wish to abuse the GST system. Non-compliance can be driven by exploitation of self-assessment processes, and ease in establishing structures and entering the GST system – including from offshore. Our ongoing challenge is using technology and data to both simplify tax compliance for the majority of those who do the right thing, and address system vulnerabilities and mitigate risk.

    The most significant compliance issues are:

    • the deliberate omission of income from activity statement reported amounts
    • unsubstantiated claims for GST on purchases
    • the use of false tax invoices.

    Controlling minds behind organised networks of multiple entities, and deliberate non-compliant intermediaries and advisers linked to phoenix strategies continue to present significant risk. They use complex arrangements and contrived structures designed to exploit the GST system and hinder collection activities.

    We continue to focus on risk-assessing individual groups and industries, to enforce a level playing field for honest businesses and ensure we deal with those engaging in GST evasion appropriately.

    Property

    A real property risk event occurs when an entity fails to correctly treat the supply or acquisition of property in accordance with GST law. Risk events can have these drivers:

    • Mistake of fact – clients incorrectly report as they do not fully understand their GST obligations, make errors when calculating their obligations, or make errors when lodging.
    • Mistake of law – clients make arguable legal interpretations of GST law to minimise GST payments and/or maximise input tax credit claims, including claims that supplies of real property should be treated as GST-free.
    • Intentional disregard – clients knowingly fail to declare or under-declare the GST on real property sales, or wilfully over-claiming input tax credits in relation to property development.
    Our approach

    In 2018–19, we focused on issues surrounding:

    • the identification and mitigation strategy to address the incorrect reporting of contra supplies, in particular related to the use of development leases
    • the emergence of the build to rent business model
    • client engagement actions to address non-compliance by disengaged property developers, including those demonstrating phoenix behaviours
    • issues relating to unimproved land
    • risks associated with retirement villages
    • the implementation of the GST at settlement measure.

    Our future focus will be on prevention approaches, including behavioural insight techniques, as well as focusing on correction. We will:

    • communicate further about the basic concepts of the margin scheme, including whether developers are eligible to use it
    • integrate the GST and income tax risk assessment of real property in our case selection (so we can determine the property cases that pose the highest risk to the revenue, and focus on prevention strategies that discourage escalating poor and deliberate non-compliance behaviours)
    • create a new self-help decision tool for taxpayers to self-assess whether the GST at settlement measure applies to their transaction.

    BAS correct reporting

    The GST correct reporting risk relates to the risk of clients incorrectly reporting their GST obligations either through non-deliberate (human error / system deficiencies) or deliberate behaviour (transaction, identity and registration fraud). This includes failure to correctly report GST payable on supplies made, and the claiming of GST credits outside entitlements (refund integrity).

    Our approach

    In 2018–19, we refined the refund integrity risk models. This resulted in fewer refunds being stopped; however, a higher proportion of the stopped refunds were corrected. Improved case prioritisation and filter-scoring improved the results in targeting high risk refunds.

    This was the first full year of operation for new suspect refund rules designed to improve detection of suspect GST refunds, including refunds attempted through identity crime. This has led to identifying increasingly complex refund integrity cases, as well as an increase in the revenue outcomes under the risk.

    We are broadening our range of strategies for clients, to make it easier for them to get it right. For example, we contacted more taxpayers this year through our self-assurance letter strategy, using behavioural insights in our letters and emails – prompting them to review their BAS and correct any errors they may have made prior to any compliance activity.

    The online BAS check (OBC) initiative is progressing. This preventative strategy alerts clients to possible errors and anomalies prior to lodging their BAS. In 2018–19, we engaged approximately 1,400 clients to test the predictive models. That enabled us to identify anomalies, and refine and improve the OBC’s risk models.

    Testing of the predictive model that generates the alerts shows a higher rate of correction by clients before they lodge, compared to self-correction without prompting, post lodgment.

    We co-designed the OBC with tax practitioners. The OBC will enhance the client lodgment experience, and support tax professionals to provide the best possible service to their clients.

    The increase in electronic lodgment will provide greater opportunities to undertake pre-lodgment type assurance, to minimise errors on the BAS in future.

    International cross-border administration

    Table 2: Net GST revenue from cross-border measures

    Measure

    2017-18
    $m

    2018-19
    $m

    Total
    $m

    Imported services and digital products

    345

    383

    728

    Low value imported goods (a)

    N/A

    348

    348

    Total

    345

    731

    1,076

    Our approach

    The administration of international cross-border GST issues has become an increasing focus of the ATO.

    A number of legislative changes over the previous three years have changed the risk landscape and impacted the administration of GST and VAT globally. This includes the collection of GST on:

    • imported services and digital products, and
    • low value imported goods.

    From a global perspective, our aim is to be more connected, and to cooperate and share information to address issues, including:

    We engage overseas businesses and help them to comply with the law by:

    • providing supporting advice and guidance products
    • using data matching to identify and address non-compliance
    • cooperating across borders.

    Our future focus includes assisting developing countries and influencing international consumption tax strategy to ensure that the right amount of GST is collected in Australia.

    Financial services and insurance

    2018–19 was the second year of our four-year strategy to deal with longstanding technical issues in the financial services and insurance industry

    The financial services and insurance (FSI) risk is the failure of:

    • a financial supply provider to correctly account for supplies and acquisitions resulting in incorrect reporting – this may include a failure to correctly deny claiming GST credits on acquisitions that relate to the making of input-taxed (financial) supplies
    • insurers to meet their GST reporting obligations – leading to reduced net GST receipts and loss of confidence in our administration of the GST system.

    Our approach

    We conducted significant consultation with clients in the FSI industry, where issues were identified and a four-year strategy was developed. Priority issues include:

    • the extent of creditable purpose
    • reduced credit acquisitions
    • the use of offshore rights and reverse charge.

    The FSI strategy assurance approach covers three areas:

    1. Service – continue proactive and collaborative industry engagement and consultation, to resolve and better understand the commercial aspects of the relevant issues, with a focus on resolving long standing technical issues.
    2. Guidance – develop greater consistency and certainty in our public rulings, determinations and practical compliance guidelines.
    3. Engagement – address existing risks with one-on-one reviews, apply justified trust methodology to selected clients to assure the absence of risks, and obtain data/evidence to inform updated guidance as needed.

    Examples of our current focus include:

    • setting out how the Commissioner’s existing views apply to specific retail banking operations, and publication of:  
      • GST Determination 2018/D1, outlining the Commissioner’s preliminary views on the creditable purpose of acquisitions in a credit card issuing business
      • a draft addendum to GSTR 2004/4, providing practical examples to show whether common acquisitions made by a home loan originator relate to the supply of services to a special purpose vehicle in the context of a typical securitisation arrangement
      • GST Ruling 2019/D1, providing the Commissioner’s preliminary views on determining the creditable purpose of common acquisitions in a transaction accounts business
       
    • drafting a practical compliance guideline outlining the ATO compliance approach to GST apportionment of acquisitions that relate to specific retail banking units
    • web content (now published) on record keeping for financial suppliers, to articulate ATO expectations for governance and record keeping for the specialised areas of GST for financial suppliers
    • a continued focus on obtaining greater assurance for the insurance sector.

    Black economy

    The black economy is a significant economic and social issue. It generally involves dishonest and criminal activities that take place outside of, or misuse or abuse, the tax and regulatory systems. An estimated $50 billion is lost to the black economy each year(b).

    The 2018–19 Federal Budget allocated the ATO more than $400 million in funding over four years to address black economy behaviours. The program of work includes:

    • more visible enforcement activities (such as mobile strike teams)
    • use of data and technology to better target black economy participation
    • education and preventative measures
    • changes to policy and law settings to make it easier to comply and hard not to
    • working across government through the Black Economy Standing Taskforce.

    In 2018–19, we received a record number of tax evasion referrals, indicating that honest businesses have had enough of their competitors doing the wrong thing. 

    We increased the visibility of our enforcement activities in 2018–19 by visiting over 10,000 businesses in 30 regional, remote and metropolitan locations.

    Future approach

    Initiatives delivered or commenced on 1 July 2019:

    • A new ATO Tax Integrity Centre, which provides a single point of contact for the community to report suspected or known illegal phoenix, tax evasion and black economy activity.
    • Businesses cannot claim deductions for payments to their employees (such as wages), where they have not complied with their PAYG or ABN withholding requirements.
    • The Taxable Payment Reporting System expanded to include security providers and investigative services, road freight transport, and computer system design and related services.
    • Businesses and subcontractors entering into Australian Government procurement contracts over $4 million are required to provide a statement from the ATO that has information about the business’s history of engagement with the tax system. This is referred to as a ‘Statement of Tax Record’.

    Emerging issues

    In 2018–19, we identified these key issues in the property sector:

    Retirement villages

    We established a whole-of-ATO consultation group to collaborate with the retirement village sector on its re-emerging and new issues that manifest from complex and rapidly changing business arrangements. The consultation group includes representatives from industry and tax professionals. We agreed on six priority issues that require further clarification, to provide greater certainty for taxpayers operating in that industry. The six GST issues are:

    • the sale of retirement villages by charities
    • GSTR 2011/1 - Goods and services tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement transitional concessions
    • the apportionment of input tax credits
    • dual intention – when a village is held for the purpose of sale and leasing activities
    • leasehold issues – including characterisation of supplies of leasehold interests, long-term leases and GST at settlement withholding obligations
    • the requirement to provide daily meals in serviced apartments.  

    Build to rent

    We recognised potential growth in the build to rent sector in Australia, fuelled by a slow-down in demand for apartment style housing and housing affordability issues. This growth is, in part, predicted to mirror that seen overseas. In response, we have published advice and guidance specific to such business models, to provide easy access for taxpayers and enable them to comply. We are working with industry and individual taxpayers to identify and address risks, as these models have different GST recovery attributes.

    Strategic litigation matters

    We developed scenario plans to address issues that may arise from strategic litigation concerning:

    • BAS adjustment issues
    • entitlements to input tax credits (including the racing industry)
    • the four year rule.

    The judgments in these cases could have a significant impact for both the administration of GST and existing ATO views.

    Future focus

    In 2019–20, we will continue to monitor global developments and assess their potential impact in Australia, particularly in relation to organised tax crime and cross-border trade. Locally, we will continue to assess and respond to new developments in the sharing economy, technological development and broader digital evolution. We will also invest in improving the use of data, to enhance the insights and intelligence from our interactions with taxpayers and the community more broadly.

    Highlight: Precious metals

    We first identified the precious metals industry as a GST compliance risk through our refund assurance process, with further intelligence provided by data analysis and profiling.

    Since 1 April 2017, a reverse charge applies on business-to-business valuable metal transactions. This covers sales between GST-registered suppliers and GST-registered purchasers of all taxable supplies of gold, silver or platinum. A reverse charge provides a level playing field for businesses trading in valuable metals, making it easier for them to meet their GST obligations. We continue to monitor the effectiveness of the reverse charge – and test compliance more broadly – within this industry.

    We continue to project manage disputes involving prior GST non-compliance within the industry before reverse charging was introduced. In 2018–19, we focused on resolving disputes with industry participants that objected to or sought review of assessments addressing such non-compliance. Our targeted intervention delivered these results:

    • Eighteen precious metal related objections were finalised. Ten of these taxpayers applied for an Administrative Appeals Tribunal (AAT) review of the unfavourable objection decisions. These are yet to be heard.
    • The AAT upheld two ATO decisions to disallow input tax credit (ITC) claims for purported creditable scrap gold acquisitions. Neither decision was appealed.
    • Two taxpayers chose to discontinue their AAT review applications regarding gold-related GST assessments before their cases were heard.
    • Three AAT reviews involving the substantiation of ITC claims for acquiring scrap gold, the GST refining provisions, and the GST general anti-avoidance rule were heard, with the decisions being reserved.
    • We succeeded in having the court appoint special purpose liquidators to:  
      • investigate potential company law breaches by an industry participant in one matter
      • replace a liquidator in another matter
      • obtain a judgment to recover an outstanding tax debt in one matter
      • oppose applications to set aside statutory demands to recover gold-related tax debts in three matters.
       

    There were 27 ongoing gold-related objections as at 30 June 2019, with 22 involving GST and penalties. Fourteen ongoing gold-related AAT reviews still to be heard; 10 of these involve GST and penalties.

    Our focus at the objection and litigation stages will continue in 2019–20.

    NOTES:(a) This measure commenced 1 July 2018(b) Black economy taskforce final report - October 2017

    New measures

    Until recently, international e-commerce consumer sales of imported services and digital products, and low value imported goods, were not subject to the same GST treatment as those sold domestically.

    The government introduced GST reforms for imported services and digital products from 1 July 2017, and world-first changes for low value imported goods from 1 July 2018. This has evened the playing field for domestic retailers, and ensures the treatment is applied to all of these supplies.

    In August 2015, the Council on Federal Financial Relations announced an intention to apply GST to the import of low value goods. The government announced the measure in the 2016–17 Budget.

    GST at settlement

    It came to our attention that some property developers making taxable sales of new residential premises or potential residential land were failing to pay to the ATO the GST collected from purchasers. This resulted in phoenixing activity and became a significant tax integrity issue. In November 2017, we identified 3,731 individuals that had actively engaged in this activity over a five-year period. These individuals controlled over 12,000 insolvent entities responsible for $1.8 billion in debt that had been written off. The insolvent entities also claimed $1.2 billion in ITC between 2013 and 2017.

    New measure

    The GST at settlement measure was announced in the 2017–18 Federal Budget and applied from 1 July 2018. It was introduced to improve the integrity of the GST system for certain property transactions.

    Purchasers of new residential premises or potential residential land are now required to withhold an estimated GST amount from the contract price at settlement and remit it to the ATO. This is then applied as a credit against the supplier’s (i.e. the property developer’s) liability to pay GST in respect of the supply.

    The measure amended the GST collection process, not the amount of GST payable by the supplier. The purchaser notification requirements of this measure allow us to identify suppliers who have not met their GST obligations, and take appropriate compliance action.

    We are addressing some reporting and systems issues. For example, forms lodged by the purchaser that contain errors requiring validation checks to be performed. The incidence of validation checks has been reduced significantly since we addressed the issue.

    Early engagement with industry in 2018 also delivered a roadmap of enhancements and improvements for this measure. These were scheduled for deployment in September and November 2019. The focus is to reduce client errors, and improve client reconciliation and ATO back-end processing.

    Figure 6: GST at settlement

    This diagram depicts the end-to-end process of a GST at settlement transaction.  Step 1A – for certain transactions the supplier is required to notify the purchaser whether or not they have a withholding obligation and, if so, they must provide the purchaser with certain particulars (some information may not be available at the time contracts exchange). Step 1B – Once the purchaser has received the supplier’s notification, where a withholding payment is required the purchaser, or their representative, completes an online form to notify the ATO about the transaction. Step 2 – On settlement, the purchaser, or their representative has to do two things: Pay the amount that it withheld from the supplier at settlement to the ATO; complete a second online form – The GST property settlement date confirmation. Step 3 – Involves the supplier lodging their BAS. Once the BAS is lodged, the amount withheld and remitted to the ATO by the purchaser will be available as a credit for the developer.

    • Step 1A – for certain transactions the supplier is required to notify the purchaser whether or not they have a withholding obligation and, if so, they must provide the purchaser with certain particulars (some information may not be available at the time contracts exchange).
    • Step 1B – Once the purchaser has received the supplier’s notification, where a withholding payment is required the purchaser, or their representative, completes an online form to notify the ATO about the transaction.
    • Step 2 – On settlement, the purchaser or their representative has to do two things:
      • Pay the amount that it withheld from the supplier at settlement to the ATO
      • Complete a second online form – The GST property settlement date confirmation.
       
    • Step 3 – Involves the supplier lodging their BAS. Once the BAS is lodged, the amount withheld and remitted to the ATO by the purchaser will be available as a credit for the developer.

    Online travel companies

    Offshore sellers of Australian hotel accommodation were exempt from including sales of hotel accommodation in their GST turnover. This created an uneven playing field for Australian-based businesses.

    New measure

    The reform removes a GST turnover concession that applies to offshore sellers. This will ensure the same tax treatment of Australian hotel accommodation whether booked through a domestic or an offshore seller. It will also allow GST-registered businesses that purchase accommodation from an offshore seller that charges GST to claim an ITC.

    The Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019External Link received royal assent on 13 September 2019 and is now law, with an effective date of 1 July 2019.

    We published initial guidance relating to retrospective application of GST and the ability to access certain payment, lodgment and penalty concessions in the first year. We will soon communicate the changes more widely, and provide support to clients that need it.

    GST estimates and director penalties

    Changes brought forward by the government and now before the Parliament will allow the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances. We are currently preparing to implement the measure.

    Other measures

    We are closely monitoring other government proposals and working with other project leads across the ATO to ensure that reform opportunities properly consider intersections with, and opportunities to include, the GST product. Current proposals include electronic invoicing and ABN reforms.

      Last modified: 01 Jul 2020QC 61031