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  • 8. Risk and assurance

    We apply a risk-based approach to the effective administration of the GST system.

    The failure of clients to meet their obligations leads to:

    • reduced collection of budgeted revenues
    • reduced voluntary compliance
    • erosion of community confidence (in the ATO)
    • negative implications for a level playing field.

    Risks to GST revenue come in the form of client behaviours and can be categorised against the four pillars of tax compliance: registration, lodgment, reporting and payment. Client behaviour and choices determine how we engage to treat risk. The justified trust program seeks greater assurance that large clients are reporting the right amount of GST. This supports and expands on existing compliance and risk approaches, further enhancing confidence in these clients.

    The key focus areas under the reporting pillar were:

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

    We have addressed risk through the lens of client segments, industries and pillars. Our treatment strategies to mitigate risk (differentiated based on client behaviours) include prevention, correction and identification/support activities.

    GST evasion

    The GST evasion risk is characterised by taxpayers attempting to gain financial benefit through deliberate and significant non-compliance with their GST obligations.

    The population engaging in GST evasion is not static, and changes constantly in response to market drivers and opportunities that can be exploited.

    The emergence of COVID-19 and the government stimulus package is one such driver, presenting new opportunities and challenges for this population. We have observed and continue to deal with suspected non-compliant behaviours to gain and maximise government stimulus measures.

    Using data analytics and updated models, we have focused on ensuring those engaging in GST evasion do not benefit unfairly from the stimulus measures. Moving into 2020–21, we will work to ensure associated GST impacts of altered business structures, income reporting and remuneration practices do not adversely impact future GST product integrity.

    While COVID-19 has directly impacted projected GST evasion casework in 2019–20, the tax evasion program (TEP) completed a broad spread of over 1,370 GST review and audit activities to address suspected GST evasion. This raised GST liabilities of $203.5 million. Other outcomes included:

    • Australian Securities and Investments Commission (ASIC) deregistrations
    • Tax Practitioner Board (TPB) deregistrations
    • prosecutions and convictions
    • pursuit of leveraged solutions, including law change or industry strategies, to close identified systemic weaknesses.

    These were our most significant bodies of work in 2019–20:

    • Assuring the integrity of tax agents; the TPB deregistered 14 tax agents as a result of GST evasion action this year. The affected client base (7,500 taxpayers) were notified of their agent’s deregistration.
    • The precious metals project was successfully closed, following the law change effective from 1 April 2017. This addressed the specific risk from some participants in the precious metals industry who chose not to account for GST payable, or claimed input tax credits inappropriately. The Courts upheld our position and our focus is assuring improved client behaviour after the law change.
    • The change to luxury vehicle ABN quoting practices via tax invoices across the supply chain closed GST evasion opportunities and gained industry support. The change was backed by successful audit cases and court decisions, supporting the Commissioner’s views. We are now satisfied that this evasion risk has come back within tolerance.

    Property industry

    Risk in the property industry occurs when an entity fails to correctly treat the supply or acquisition of property in accordance with GST law.

    Property continues to be a key focus given the scale of the property and construction industry and the potential impacts on revenue. Property risk impacts all client experiences and concerns all levels of government.

    Table 5: Compliance activities results, 2018–19 and 2019–20

     

    2018–19

    2019–20

    Disengaged property developers

    Raised $201 million in liabilities from 1,208 audits and reviews.

    Raised $205 million in liabilities from 818 audits and reviews.

    Other GST risks in the property market

    Raised over $157 million in liabilities from 2,331 audit and review cases.

    Raised over $285 million in liabilities from 4,195 audit and review cases.

    We focused on the following issues in 2019–20:

    • Retirement villages – We established a whole-of-ATO consultation group to collaborate with the retirement village sector on the resolution of key issues that manifest from complex and rapidly changing business arrangements.
    • Build to rent – We recognised a 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. Build to rent developments provide longer term rental accommodation to residential tenants, with lease terms typically up to five years or more. We are working with industry and individual taxpayers to identify and address risks, as these models have different GST recovery attributes.
    • Development leases – We have identified the potential for GST leakage in development lease arrangements which involve the supply of unimproved land. Following the release of Taxpayer Alert 2018/3, we are reviewing GSTR 2015/2 and have developed further public advice to specifically address common lease arrangements in the Australian Capital Territory.
    • GST at settlement – In 2019–20, 90,900 property transactions were notified with a withholding obligation, with payments of $3.3 billion in GST. We are seeing property developers staying in the system, and less phoenixing activity. Though payments are sent to us by the purchaser, we have seen some property developers trying to recoup the GST by not reporting sales, or over-claiming deductions. Overall, the measure has had the desired effect of reducing the risk of phoenixing and disengaged property developers.
    • Tax law partnerships – We have identified a significant increase in the use of tax law partnerships in property development arrangements. These arrangements seek to avoid the ‘joint and several’ liability of partners and effectively delay GST liability, providing a significant timing advantage for participants. There is a high degree of uncertainty within the industry regarding the reporting of such arrangements. Work is ongoing within the ATO, in collaboration with industry, to clarify the ATO position.

    COVID-19 has resulted in some significant changes to the property and construction market:

    • Stimulus packages implemented by the government to encourage ongoing work in the property and construction sector. The full impact of these initiatives and the potential risks arising from the abuse of the schemes is yet to be understood.
    • Possible disruption to international supply chains (decline in manufacturing, port closures) adversely impacting construction projects.
    • Commercial and residential rental income has been negatively impacted.
    • Changes in work practises, with the shift of people working from home.
    • Changes in behaviours, including an increased number of suppliers incorrectly advising the sale of property is not subject to GST.

    BAS correct reporting

    The integrity of our GST refund system was maintained, with a focus on fraudulent activity and high-risk refunds. Monitoring of risk model outcomes and case work intelligence ensured our controls and treatment strategies remained effective.

    Our priority during 2019–20 was to ensure clients received their entitled GST refunds as quickly as possible, and to administer the COVID-19 stimulus measures.

    In response to the bushfire disasters, GST refunds were fast-tracked to assist impacted clients.

    Staff undertaking pre issue GST refund reviews also checked client risks associated with the Cash Flow Boost and JobKeeper eligibilities. Targeted treatment approaches were implemented for fraud and evasion behaviours associated with the Cash Flow Boost.

    As the Cash Flow Boost stimulus measure was delivered as a credit to the BAS, we integrated our GST refund integrity risk models with additional BAS integrity checks. This ensured there was no degradation to the:

    • performance of our risk models, and
    • effectiveness of our pre issue assurance work to review high risk GST refunds.

    We incorporated an agent view of risk into our modelling, to identify risk behaviours and cases associated with high risk agents.

    There was no significant shift in high risk GST refund behaviour for small business clients, who account for 75% of lodgments. Inadvertent errors remained the primary cause of incorrect reporting on the BAS for small businesses.

    A significant decrease in refund revenue adjustments from the previous year is primarily due to the reduction in value of refund amounts for BAS stopped for review. The number of pre issue adjustments and adjustment rate results have not changed significantly. In 2018–19, there were a number of cases with significant refund adjustments.

    Table 6: Compliance activities results, 2018–19 and 2019–20

     

    2018–19

    2019–20

    GST refund claims

    33,563 GST refund cases were undertaken, raising nearly $506 million in GST liabilities, with:

    • 14,130 verified before payment of refund, resulting in nearly 3,600 adjustments and $460 million in liabilities
    • 2,254 verified after payment of refund, resulting in nearly 500 adjustments and $46 million in liabilities
    • 17,179 tailored advice letters issued.
     

    26,258 GST refund cases were undertaken, raising over $306 million in GST liabilities, with:

    • 12,509 verified before payment of refund, resulting in 3,440 adjustments and $273 million in liabilities
    • 1,334 verified after payment of refund, resulting in 225 adjustments and $33 million in liabilities
    • 12,415 tailored advice letters issued.
     
    Note: The tailored advice letters ask clients to review and check the GST and other amounts reported on the BAS. If the client finds any errors, they are required to revise the BAS by a particular date. It provides examples of the types of errors to look for, including incorrect figures or figures in the wrong place; any invoices that do not include GST, or; GST on private expenses that may have been included. If the client finds that the BAS is correct, they do not need to do anything further.

    International cross-border administration

    International cross-border (ICB) risk covers every transaction that crosses the Australian border, in physical goods, or in the form of services and other intangibles.

    Our priorities in 2019–20 for international cross-border GST issues were:

    • implementing the new measure to extend GST to offshore sellers of hotel accommodation in Australia
    • consolidating the compliance approaches for GST on low value imported goods and digital products and services.

    From 1 July 2019, GST was extended to ensure that offshore sellers of hotel accommodation in Australia calculated their GST turnover in the same way as local sellers. COVID-19 has significantly impacted the travel sector, and as a result further assurance activities are on hold.

    To help promote the adoption of a consistent framework, we are supporting the development of a consumption tax toolkit by the World Bank and the OECD. This toolkit will form an integral resource in the way consumption tax is administered for cross-border digital supplies. We continue to assist countries on a bilateral basis to achieve this end.

    In 2020–21, an ATO representative will assist the OECD with the development of a regional VAT/GST digital toolkit. The toolkit is designed to assist tax authorities in Latin America and the Caribbean, and subsequently South-East Asia and Africa. This is to implement reforms to apply VAT/GST to cross-border consumer supplies of digital products and services and low value imported goods. The ATO as a leading tax administrator is continuing to advance consistency in the administration of consumption tax on the global stage.

    Domestically we undertake activities which provide assurance that GST obligations are being met.

    In 2019–20, to encourage compliance we ran:

    • educational campaigns such as webinars – partnering with international and domestic logistic providers to educate their clients on GST cross-border issues
    • awareness campaigns – writing directly to new or emerging non-residents regarding potential GST obligations.

    To identify un-registered entities, we have:

    • supplemented third-party financial transactions with data from other agencies such as Australian Border Force
    • increased our exchange of information with other jurisdictions – this is to compare their registered client list to ours, and where appropriate we have sought assistance from other jurisdictions to support our compliance activities
    • assessed community information against third-party data to determine the existence of tax risks.

    Where we have detected non-compliance, we have engaged directly with the taxpayers to ensure GST obligations are met.

    Since the introduction of GST in 2000, Australia has been considered a pioneer in the collection of VAT/GST. Many countries and international organisations have praised ATO innovations.

    • The role of Digital Platforms in the Collection of VAT/GST on Online Sales External Link- David O’Sullivan – Consumption Taxes OECD – “This is something that we (the OECD) are selling to many countries around the world saying look it’s working in Australia, and you can apply it as an effective means to raise GST revenue”.
    • Taxation of Physical Goods in the Context of E-commerce: Avoiding Non-tariff Barriers through Simple and Consistent Design - International Chamber of Commerce (ICC) – “Australia has introduced a model for collecting GST which ICC believes should be looked at carefully as a potential solution to enhance indirect tax collection models in other countries. The process has delivered revenue in excess of expectations and compliance is high. Though this GST regime is relatively new, early experience suggests that it is an efficient and effective way of taxing physical goods sold via digital platforms”.
    Table 7: Net GST revenue from cross-border measures

     

    2017–18

    $m

    2018–19

    $m

    2019–20

    $m

    Imported services and digital products

    352

    393

    438

    Low value imported goods

    n/a

    357

    385

    Total

    352

    750

    823

    Note: Imported services and digital products commenced on 1 July 2017. Low value imported goods commenced on 1 July 2018.

    Financial services and insurance

    We seek to obtain greater assurance that financial services and insurance (FSI) GST obligations are correctly reported, and to provide certainty to clients of the ATO’s interpretation and application of GST law within the industry.

    The major risk targeted in 2019–20 was apportionment methods used by financial institutions that are highly complex and have evolved over time, increasing input tax credit entitlements significantly. The risk is that these methodologies are not correctly applying the law and are not fair and reasonable in reflecting the extent to which acquisitions relate to input taxed financial supplies. This is occurring in the banking sector, with concerns in respect of credit card issuers, deposit taking institutions and home loan lenders.

    Our strategy sets out the ATO view on apportionment methods and provides certainty as to the methodologies we consider fair and reasonable.

    In 2019–20, we:

    • published web content on GST governance and record keeping for financial suppliers, to articulate ATO expectations in relation to our priority issues
    • focused on obtaining greater assurance for the insurance sector
    • transitioned from industry engagement to justified trust engagement across Top 100 and 1000 populations and a monitoring/effectiveness phase
    • reduced revenue and reputational threats by progressively implementing the apportionment treatment strategy, which is shifting industry behaviour and leading participants to adopt lower risk positions
    • set out how the Commissioner’s existing views apply to specific retail banking operations, and publication of
      • GSTR 2019/2 and PCG 2019/8 with Schedule 1: Credit cards, outlining the Commissioner’s views on the creditable purpose of acquisitions in a credit card issuing business
      • draft addendum to GSTR 2004/4, providing practical examples on the creditable purpose of acquisitions made by home loan originators
      • GSTR 2019/D1, PCG 2019/8 with Draft Schedule 2: Transaction accounts and GSTD 2020/D1, providing the Commissioner’s views relevant to determining the creditable purpose of common acquisitions in a transaction accounts business.
       

    Black economy

    The black economy is a significant economic and social issue affecting our community. It exploits vulnerable employees and provides an unfair advantage to businesses that participate in dishonest and criminal activities associated with the abuse of our tax and superannuation systems.

    The 2018–19 Federal Budget allocated the ATO more than $400 million in funding over four years to address black economy (cash or hidden) behaviours. Activities to address the behaviours include:

    • more visible enforcement activities
    • using 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.

    Our data and analytics have been enhanced to better target those doing the wrong thing, while encouraging the right behaviours through education and prevention activities. With increased visibility of the response to address the black economy, approximately one quarter of the tip-offs from the community received by the Tax Integrity Centre related specifically to black economy behaviours (from a total of over 56,000 tip-offs). The Black Economy Standing Taskforce established processes to lawfully disclose intelligence and work across government agencies to address black economy behaviours.

    The second year of the black economy program of work (2019–20) was impacted by natural disasters and COVID-19. Over 5,100 businesses across 22 metropolitan, regional and remote locations were visited by the ATO prior to ceasing visits in December 2019, with many other activities slowed or put on hold in response to natural disasters and COVID-19.

    In 2019–20, we raised $109 million in GST liabilities from cases associated with the black economy that did not pay the correct amount of GST.

    Moving into year three of the black economy program, we continue to monitor intelligence to detect and deter black economy behaviour.

    Justified trust

    Justified trust is achieved when we have evidence that reporting of GST is complete and accurate. Our justified trust methodology provides appropriately structured and tailored engagements with our largest, most consequential clients.

    We continue to integrate our approaches to implement the justified trust work program from a whole-of-client and multiple tax perspective. We have sought to obtain greater assurance that large corporate groups are complying with their GST obligations, with a focus on:

    • inadvertent errors
    • the reliability of the information reported in the BAS
    • the right amount of GST being collected and paid/claimed.

    Incorrect reporting from inadvertent errors is one of the main GST risks identified through these reviews. Most GST amended assessments in the large market were the result of voluntary disclosures arising from processing or systems errors. We continue to update our website to highlight these risk areas, and strongly recommend taxpayers focus on improving their tax governance to reduce inadvertent errors.

    We have observed more taxpayers engaging external advisers to assist in self-assessing the effectiveness of their tax control framework. To assist with this, we published the GST Governance, Data Testing and Transaction Testing Guide to support our GST assurance reviews processes for governance, data and transaction testing in the Top 100 and Top 1000 markets.

    Top 100 and 1000 programs

    Under our justified trust program, we undertake specific tax assurance engagements with the Top 100 and Top 1000 public and multinational businesses:

    • GST and income tax teams work collaboratively to deliver justified trust assurance reviews across both taxes under the Top 100 program.
    • Our GST assurance reviews under the Top 1000 program are conducted on a stand-alone basis. In addition, we are commencing new Top 1000 integrated reviews which will substantially increase our GST coverage of the Top 1000 population and identify higher risk taxpayers for a GST assurance review.

    As at 30 June 2020, 13 Top 100 and 29 Top 1000 GST reviews were completed under the GST compliance program, which provided additional funding to increase assurance in the large market. In these reviews, most taxpayers have reached an overall medium level of assurance. This means we have obtained assurance in relation to some, but not all areas reviewed. Further evidence and/or analysis may be required.

    New GST assurance reviews were not commenced from April to June 2020 due to COVID-19 (except for a small number of Top 100 cases which were started with the client’s approval). GST assurance reviews for the Top 100 and Top 1000 programs will be progressively restarted over the coming months.

      Last modified: 30 Aug 2021QC 64820