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  • 5. GST compliance risks

    GST compliance risk is the risk of clients’ attitudes, behaviour and choices impacting on their ability to correctly meet their GST obligations. 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.

    We see clients’ behaviour range on a spectrum from those who don’t know what to do, to those who are faced with setbacks, to those who play the system and deliberately avoid their obligations. The ATO currently manages work programs to mitigate the following risks:

    • Not meeting the 4 pillars of tax compliance – registration, lodgment, payment (often referred to as debt), and correct reporting.
    • Industry and structural risks – real property transactions, financial services and insurance, refund integrity, international and cross-border, and evasion.

    Registrations

    We help people to correctly register in the GST system and to exit the GST system when required.

    From 1 July 2020 to 30 June 2021:

    • Approximately 409,000 new GST registrations requests were received. The 10% growth in requests from last year was driven by the financial services, construction and retail trade sectors. This was partially offset by fewer transport services registrations than last year.
    • Approximately 253,000 GST registration cancellations were processed. This was approximately 4% less than last year and reflected in lower cancellations in the construction, and professional, scientific and technical services sectors.

    As of 30 June 2021, our register had 3.1 million active GST registrants, compared to 2.9 million in 2019–20. Those sectors showing the highest growth rates in net registration for the current year include health, retail trade and administrative and support services. Small business clients have comprised 78% of active GST registrants over the past 2 years.

    Table 7: Total registered client base by client experience

     

    2016–17 million

    2017–18 million

    2018–19 million

    2019–20 million

    2020–21 million

    Small business

    -

    -

    -

    -

    2.4

    Privately owned and wealthy groups

    -

    -

    -

    -

    0.4

    Public and multinational businesses

    -

    -

    -

    -

    0.1

    Not-for-profit

    -

    -

    -

    -

    0.1

    Other

    -

    -

    -

    -

    0.1

    Total registered client base

    2.7

    2.7

    2.8

    2.9

    3.1

    Note: Total registered client base by client experience is reported for the first time in 2020–21. This is the total registered population as of 30 June 2021. Over time this measure will show how fluid the client base is through GST registrations.

    Detecting and deterring GST refund fraud in the community by gathering intelligence and cancelling unnecessary GST registrations ensures the integrity of our register. This year more than 22,900 GST registrations were checked, resulting in:

    • 2,791 cancelled registrations
    • more than 360 enterprises referred for further investigation.

    Debt and lodgment

    Engagement with clients was driven by our response to COVID-19 and is represented by the phased engagement strategy we used in 2020–21:

    • Help and assist (June 2020) – interactions aimed at understanding the client’s circumstances and obligations and providing the appropriate support.
    • Advice about future action (February 2021) – gradual reintroduction of messages about potential future action we may take, if appropriate, for clients who continue not to engage.
    • Additional action if required and appropriate (April/May 2021) – firmer and stronger actions where appropriate.

    Also, in response to COVID-19, referrals to external collection agencies (ECAs) were suspended in March 2020. In lieu of referrals to ECAs, we moved to a new model where additional contract staff performed outbound telephony work to keep clients engaged.

    Our strategy centred on enhanced engagement interactions with clients or their representatives to secure outstanding lodgments, resolve the debt, or enter into a payment plan. Where the client chose not to engage with the ATO to resolve their obligations, subsequent firmer action was considered.

    Along with our ongoing automated activity (SMS/letters), all available outbound telephony capacity was directed towards GST/BAS debt from mid-May 2021. This included an increase in firmer action activity across a ‘sophisticated’ client population comprising large employers, public and multinational businesses, and privately owned and wealthy groups. This firmer-action strategy was effective, with a positive outcome from two-thirds of the selected population.

    Debt

    At 30 June 2021, total GST debt was $10.7 billion, up 4.7% compared to last year and 88% higher than 2018–19. GST collectable debt was $8.8 billion, up 11.4% compared to last year and 105% higher than 2018–19. The factors that contribute to the significant growth against 2018–19 are:

    • the ongoing impacts of droughts, bushfires and COVID-19
    • the ATO pausing most debt recovery activities between March 2020 and mid-May 2021.

    Total and collectable GST debt continued to grow in 2020–21 as clients experienced cash flow issues, particularly those impacted by the dynamic economic environment as a result of COVID-19. Clients were encouraged to lodge outstanding obligations even when they could not pay. Part of this debt relates to clients who may have ceased trading, or walked away from their businesses part way through the year.

    Table 8: GST debt core indicators

     

    2016–17

    2017–18

    2018–19

    2019–20

    2020–21

    Total GST debt outstanding ($b)

    5.6

    5.5

    5.7

    10.2

    10.7

    GST Collectable debt ($b)

    3.8

    4.0

    4.3

    7.9

    8.8

    Insolvent debt ($b)

    -

    -

    -

    -

    1.6

    Disputed debt ($b)

    -

    -

    -

    -

    0.3

    Debt collection rate – TLM accrual (%)

    6.2

    6.2

    6.4

    11.8

    12.1

    Debt collection rate – cash (%)

    6.4

    6.3

    6.6

    13.1

    12.0

    Note: Collectable debt is debt for which there is no impediment to collection – it is not subject to objection or appeal, or to some form of insolvency administration.The debt collection rate is calculated using the GST collectable debt amount as a percentage of 12 month rolling GST (TLM accrual or cash) collections. This is a measure used by several revenue agencies to gauge their relative effectiveness in managing their debt holdings. Insolvent and disputed debt are reported for the first time in 2020–21.

    We take a differentiated approach to maximise the outcome for each of our different client segments, while ensuring we consider clients’ individual circumstances. As shown in Table 9, $6.3 billion (70%) of GST collectable debt is attributed to small businesses (representing 78% of total GST registrants) and may need help and support to understand, and meet, their obligations.

    GST debts are treated utilising analytical models that consider clients’ overall position and help determine the appropriate action. Work continues with clients to determine what support may best suit their circumstances, including options such as deferral of due dates and payment plans. Clients facing difficulty meeting their obligations are encouraged to contact us so we can assist them. Our aim is to maintain engagement.

    Table 9: GST collectable debt by client experience

     

    2016–17 ($b)

    2017–18 ($b)

    2018–19 ($b)

    2019–20 ($b)

    2020–21 ($b)

    Individuals

    -

    0.1

    0.2

    0.3

    0.4

    Small business

    -

    3.0

    3.0

    5.4

    6.3

    Privately owned and wealthy groups

    -

    0.7

    0.8

    1.6

    1.8

    Public and multinational businesses

    -

    0.1

    0.2

    0.4

    0.3

    Other

    -

    0.0

    0.1

    0.2

    0.1

    Total

    3.8

    4.0

    4.3

    7.9

    8.8

    Note: Other includes not-for-profit, APRA regulated super funds, SMSF and unknown. Totals may differ from the sum of components due to rounding.

     

    The ongoing impacts of natural disasters and COVID-19 on the ageing of GST debt can be seen in Figures 10 and 11 below. In particular, the increase in the >365 days aged category highlights clients experiencing ongoing challenges with meeting their obligations at the commencement of the pandemic.

    Figure 10: Ageing of GST debt by number of BAS debit assessments

    This graph shows ageing of GST debt by number of BAS debit assessments for 2019–20 and 2020–21 
2019–20 0–29 days 756,548; 30–59 days 274,567; 60–89 days 56,692; 90–365 days 688,893; >366 days 778,55,
2020–21 0–29 days 181,085; 30–59 days 236,618; 60–89 days 35,198; 90–365 days 613,595; >366 days 1,142,118.
Note: Figures reported for 2019–20 and onwards are derived from a new reporting source due to transition to a single accounting system. A GST debt may appear in multiple age ranges where the client owes amounts relating to multiple assessments. Total GST debt aged represents the number of activity statement accounts multiplied by a GST attribution rate.

     

    Figure 11: Ageing of GST debt by value  

    This graph shows ageing of GST debt by value in millions for the last five financial years.
2016–17 0–29 days 409; 30–59 days 553; 60–89 days 163; 90–365 days 1,252; >366 days 1,461,
2017–18 0–29 days 441; 30–59 days 559; 60–89 days 109; 90–365 days 1,406; >366 days 1,485,
2018–19 0–29 days 426; 30–59 days 564; 60–89 days 129; 90–365 days 1,511; >366 days 1,639
2019–20 0–29 days 1,006, 30–59 days 1,705; 60–89 days 470; 90–365 days 2,701; >366 days 1,987,
2020–21 0–29 days 835; 30–59 days 1,270; 60–89 days 248, 90–365 days 2,745; >366 days 3,668.

    Note: Figures reported for 2019–20 and onwards are derived from a new reporting source due to transition to a single accounting system. Age of debt is determined by the latter of the processed date or the effective date of the transactions.

    Lodgment

    Although the number of BAS lodged has increased steadily, the number of BAS dispatched and due has been increasing at a faster rate. As a result, the BAS on-time lodgment rate has declined. We are in the process of identifying the entities that are still expected to lodge, to ensure our lodgment on-time measure is reflective of only those required to lodge.

    Lodgment performance

    Monthly BAS – The on-time lodgment performance for 2020–21 BAS due as at 30 June 2021 is 78.5%, 3.3 percentage points below the 2019–20 results and 4.9 percentage points below 2018–19 results.

    Quarterly BAS – The on-time lodgment performance for 2020–21 BAS due as at 30 June 2021 is 67.3%, 3.7 percentage points below the 2019–20 results and 5.8 percentage points below 2018–19 results.

    Table 10: BAS lodgment

     

    2016–17 %

    2017–18 %

    2018–19 %

    2019–20 %

    2020–21 %

    Lodged (monthly)

    93.2

    93.4

    93.0

    90.8

    89.9

    Lodged (quarterly)

    85.3

    85.4

    85.6

    82.3

    81.9

    Total BAS lodged (including annual BAS)

    87.6

    87.7

    87.7

    84.6

    84.1

    Lodged on time (monthly)

    83.5

    83.7

    83.4

    81.8

    78.5

    Lodged on time (quarterly)

    73.5

    73.9

    73.1

    71.0

    67.3

    Total lodged on time (including annual BAS)

    76.4

    76.6

    76.0

    74.0

    70.3

    Overall online lodgment of BAS has increased 11.4% over 5 years, from 77.5% (2016–17) to 88.9% (2020–21). Annual remitters’ online lodgment has increased over 20% for the same time-period.

    Table 11: BAS lodgment method – percentage of BAS lodged electronically

     

    2016–17 %

    2017–18 %

    2018–19 %

    2019–20 %

    2020–21 %

    Monthly remitters

    76.8

    80.5

    83.7

    87.4

    92.2

    Quarterly remitters

    77.8

    80.7

    83.6

    88.2

    88.4

    Annual remitters

    74.9

    89.1

    91.0

    91.3

    95.0

    Overall

    77.5

    81.0

    83.8

    88.2

    88.9

    Correct reporting

    We address the risk of clients incorrectly reporting their GST obligations primarily through our Client Engagement Group. Our treatment strategies to mitigate risk (differentiated based on client behaviours) include prevention, correction, leverage and identification/support activities.

    The key focus areas under the reporting pillar are:

    • GST evasion
    • High-risk refunds
    • International and cross-border
    • Real property transactions
    • Financial services and insurance

    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.

    Throughout 2020–21 we maintained a focus on:

    • preventative detection and deterrence activities to address systematic GST refund fraud
    • increasing community confidence through the assurance of tax agent integrity and referrals to the Tax Practitioners Board (TPB)
    • remediating vulnerabilities across the ATO and Australian Business Register (ABR) to strengthen the GST system.

    While COVID-19 affected GST evasion casework throughout 2020–21, the Phoenix and Tax Evasion programs completed more than 890 GST reviews and audit activities to address suspected GST evasion, resulting in GST liabilities of approximately $153 million.

    Other outcomes included:

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

    Information about fraud or evasion GST-related assessments conducted in 2020–21 is shown in Table 12. In 2020–21, 16 taxpayers were subject to a fraud or evasion GST-related assessment; all incurred an additional penalty. These taxpayers represented 0.15% of all taxpayers subject to a GST audit-related assessment.

    Table 12: Fraud or evasion GST assessments by client experience, 2020–21

     

    Number of taxpayers subject to a GST audit-related assessment

    Taxpayers subject to a GST fraud or evasion assessment

    Number

    % of taxpayers subject to a GST audit-related assessment

    Number with an additional penalty

    Individuals

    232

    -

    -

    -

    Small business

    9,578

    8

    0.08

    8

    Privately owned and wealthy groups

    787

    5

    0.64

    5

    Public and multinational businesses

    221

    3

    1.36

    3

    Not-for-profit

    75

    -

    -

    -

    Self-managed super funds

    43

    -

    -

    -

    APRA super fund

    2

    -

    -

    -

    Total

    10,938

    16

    0.15

    16

    Note: The tax law fraud or evasion exception to limited periods of review found within the income tax, superannuation and GST Acts allows that, if in the Commissioner’s opinion there is fraud or evasion, the Commissioner is not constrained and may amend an assessment at any time.

     

    Information about fraud or evasion assessmentsExternal Link also appears in the ATO annual report 2020–21.

    High-risk refunds

    Throughout 2020–21, we achieved strong revenue results from our high-risk refund case work. As the business community continued to be impacted by COVID-19 and lockdowns, we continued to help clients obtain their entitled GST refund as quickly as possible.

    The ATO’s administration of stimulus measures commenced in 2019–20 and extended into 2020–21, with continued focus on the integration of our risk models and triaging clients who were lodging GST refund claims and were eligible for stimulus measure payments. This ensured there was no degradation to the performance of our GST refund integrity models or the effectiveness of our pre-issue assurance work to review high-risk GST refunds.

    The additional profiling and triage work improved strike rates from 85% in 2019–20 to 94% in 2020–21, and increased revenue results from $306 million to $484 million, respectively. The detection of suspect refund activity resulted in significant revenue results from several high-risk refund cases in the last quarter of 2020–21.

    Table 13: Refund integrity active compliance liabilities raised and strike rate

     

    Strike rate

    Liabilities

     

    2018–19 %

    2019–20 %

    2020–21 %

    2018–19 %

    2019–20 %

    2020–21 %

    Small business

    -

    -

    95

    -

    -

    374

    Privately owned and wealthy groups

    -

    -

    74

    -

    -

    66

    Public and multinational businesses

    -

    -

    85

    -

    -

    19

    Not-for-profit

    -

    -

    92

    -

    -

    4

    Other

    -

    -

    96

    -

    -

    20

    Total

    77

    85

    94

    506

    306

    484

    Note: Refund integrity active compliance liabilities raised and strike rate is reported by client experience for the first time in 2020–21.

     

    The client contact approach through our tailored advice letters was paused for part of 2020–21 due to COVID-19 impacts on business. The correspondence recommenced in early 2021, however letters originally scheduled for late May 2021 were delayed, and issued after 30 June 2021. The impacts of this correspondence will now appear in 2021–22 results.

    International and cross-border

    This risk is associated with the GST treatment of goods or services that cross Australia’s border.

    Our focus in 2020–21 was primarily on supplies from offshore involving digital products and services or low value goods (A$1,000 or less) sold to consumers in Australia.

    In 2020–21, we were particularly mindful of the global impact of COVID-19 and how this affected those offshore businesses with obligations under the GST law. We provided administrative support to them in fulfilling their obligations. For example, by providing assistance with reporting obligations when lockdowns prevented access to the ATO’s online services for non-residents system.

    While there was potential for significant impact on these businesses, given the extended periods of lockdown for significant percentages of the Australian population, the increase in GST revenue for supplies of digital products and services was an expected outcome. GST revenue for both measures increased when compared to 2019–20. Almost $1 billion in GST was collected and paid in 2020–21.

    Table 14: Net GST revenue from cross-border measures

     

    2017–18 $m

    2018–19 $m

    2019–20 $m

    2020–21 $m

    Digital products and services

    355

    400

    455

    545

    Low value imported goods

    -

    360

    400

    445

    Total

    355

    760

    855

    990

    Note: GST administration of digital products and services commenced on 1 July 2017. GST administration of low value imported goods commenced on 1 July 2018. All figures have been rounded to the nearest $5m.

     

    Our focus in 2020–21 was on identifying businesses with obligations under these measures and bringing them into Australia’s GST system. We use a combination of data held by the ATO, and external sources, to identify these businesses and quantify their level of sales to consumers in Australia. Appropriate strategies are then used to assist businesses in meeting their obligations. These strategies range from educational activities designed to raise awareness of potential obligations under our law, through to targeted contact with individual businesses and/or their representatives. Where necessary, we use compliance reviews and audits to engage with offshore businesses that may be resistant to meeting their obligations under the law.

    To the end of June 2021, our review and audit program finalised 51 cases, resulting in an additional $55.7 million in GST revenue. Importantly, the businesses subject to these activities have remained engaged and compliant with law beyond the closure of the cases.

    Throughout 2020–21, 250 businesses supplying digital products and services, or low value goods registered for Australian GST.

    We have engaged in bilateral discussions with other countries that have approached us for information on our experience in designing, implementing, and administering our law applying GST to these supplies. We have also continued to support the OECD in its forums dealing with this subject. Participating in these discussions allows us to share the success of our administration that is closely aligned to OECD principles, and promotes international consistency in applying value-added taxes to these transactions. The greater the level of consistency, the easier it is for business, leading to higher levels of engagement and compliance.

    In 2020–21, the ATO assisted the OECD in developing a regional VAT/GST digital toolkit to assist tax authorities in Latin America and the Caribbean with implementing reforms to apply VAT/GST to cross-border business to consumer supplies of digital products and services and low value imported goods. This work will continue in 2021–22, with the ATO contributing to the development of a similar toolkit for Asia Pacific countries.

    Real property transactions

    A real property transaction risk occurs when an entity fails to correctly treat the supply or acquisition of property in accordance with GST law. The GST real property industry risk is endemic and exists in all client experiences.

    While some client engagement activities were temporarily paused due to COVID-19, the residential property market boom, and increased residential sales meant liabilities raised were higher than anticipated.

    We focused on the following issues in 2020–21:

    • Development agreements – the ATO position is currently being challenged by litigation regarding the non-monetary consideration of works undertaken as part of a development agreement. This litigation may change the ATO interpretations of ‘consideration’ and may have a wider impact than real property transactions. There are several audits and objections on hold pending the outcome of this decision.
    • Misuse of GST concessions – GST at settlement data has identified a risk associated with the use of the margin scheme. Since GST at settlement commenced, we have identified that approximately 70% of residential developments are applying the margin scheme. There are 3 key risks associated with this:

    1. Developers may be using the margin scheme when they are not eligible.

    2. Where developers are eligible, they are using cost base methods that are incorrectly reducing the GST payable.

    3. Large businesses may be using an apportionment method that is not ‘fair and reasonable’ and is contrary to ATO public advice.

    Our web guidance has been updated to help people understand their eligibility in applying the margin scheme. Additionally, the GST property decision online tool has been redesigned to accurately reflect both eligibility and calculation of the margin for the taxpayer. This update will go live in December 2021.

    • GST at settlement – We successfully liaised with Property Exchange Australia (PEXA) to incorporate the GST at settlement reporting obligations within the business systems of conveyancers, resulting in ATO online forms no longer being required. The integrated forms are pre-populated with information already provided within PEXA, thus reducing duplication. In conjunction with PEXA, we have also introduced an automated cancellation process that negates the need for the conveyancer to contact the ATO, saving time for both the conveyancer and ATO.

    In 2020–21, we matched GST at settlement data with land titles transfers data from the states and territories against BAS data. We then wrote to a pilot group of taxpayers advising them of the information held by the ATO on their property sale and provided them with an opportunity to amend their BAS without penalty imposition. We had a 50% response rate to this letter and this approach is now being incorporated in our GST at settlement strategy.

    To further assist with correct GST reporting, we plan to include ‘nudge’ messaging in the ATO Online and Online services for business, advising clients that property data indicates that a sale will need to be reported in their BAS.

    • Build to rent –This is traditionally input taxed, as it is the supply of residential accommodation. The business model is rapidly changing to move into commercial residential premises. However, there is still some uncertainty about what is input taxed, what is taxable, and what happens when the conditions or services offered within a commercial residential premises change. The ATO is working with industry and the states and territories to develop a consistent understanding of build to rent, the risks and ways to improve the client experience.

    Financial services and insurance

    The financial services and insurance (FSI) industry risk is that GST obligations and entitlements are not reported in accordance with the specific provisions in the GST law for financial services and insurance. The GST FSI strategy aims to obtain greater assurance that clients in the industry are reporting the right amount of GST. This involves engagement with the FSI industry and advisers to communicate:

    • the ATO’s focus areas
    • the pathway for clients to obtain justified trust
    • technical advice on relevant GST issues across the ATO.

    Highlights for 2020–21 included:

    • Productive engagement with banks to ensure compliance with our recent public guidance on GST apportionment of costs to provide credit cards, transaction accounts and home loans. As a result. many banks have agreed to transition their arrangements to be in-line with the guidance in products, such as Practical Compliance Guideline 2019/8: ATO compliance approach to GST apportionment of acquisitions that relate to certain financial supplies. These products have achieved the intended behavioural change, with industry participants adopting lower risk positions resulting in significant revenue effects.
    • Bespoke data tests provided to both the financial services and insurance industries. Based on observations of common errors, these tests can be used to ensure correct reporting in relation to specific GST risks. While these tests are conducted in reviews, industry participants have been encouraged to apply the tests as part of their preparatory work prior to a review.
    • Guidance provided to the banking industry, regarding how the ATO will review GST risks involving the entitlement to reduced input tax credits on acquisitions under complex IT outsourcing agreements.
    • A workshop with the Australian Banking Association to ensure a shared understanding of the application of the ATO’s GST governance, data testing and transaction testing guide within the industry.
    • Consultation on proposed additional disclosures by banks (included in the Top 100 program) to the ATO under Annual Compliance Arrangements. The aim is to improve real-time transparency and engagement on GST issues, and to enable the ATO to effectively monitor emerging GST risks.

    Engagement with industry and advisers to communicate the ATO’s areas of focus in our reviews. For example, we engaged with industry on the GST treatment of fee for no service remediation payments related to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services IndustryExternal Link.

      Last modified: 07 Feb 2022QC 67817