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  • Issue 22 Compliance

    22.1 ATO notice to release parties bound by confidentiality clause

    CPAA commented there were concerns in releasing documents to the ATO where a party to the contract was bound by a confidentiality clause. CPAA requested ATO to consider producing a formal notice that imposed an obligation for a party to release that information so that they would not appear to be breaching clients' confidentiality.

    Contributed by CPAA

    ATO response

    A compliance verification check of a taxpayer may have been proceeding without resort to formal access powers. If the taxpayer expresses concern about providing access to or copies of a particular document that may contain confidential information relating to third parties, the taxpayer would be entitled to request that the compliance officer resort to the use of formal access powers in relation to that document. The compliance officer would arrange to provide the taxpayer with a formal request pursuant to section 264 of the Income Tax Assessment Act or section 65 of the Tax Administration Act as the case may be.

    If the request is for access to or copies of documents held by a third party, the compliance officer should always obtain access using the formal powers in the relevant legislation.

    22.2 Compliance and Correcting GST mistakes policy

    The Correcting GST mistakes fact sheet provides a process for taxpayers to correct mistakes without exposure to penalties or GIC.

    The fact sheet states that the procedure is not available once advice of ATO compliance action has been received.

    What is the position where it can be demonstrated that a taxpayer recognised an underpayment (within the time and amount thresholds) and made the decision to make an adjustment in the current Business Activity Statement (BAS), but ATO compliance action commenced before the due date of lodgment of the current BAS?

    ATO response

    This response assumes in all cases that the error:

    • is known by the entity;
    • is within time and correction limits set out in the Correcting GST mistakes fact sheet;
    • is disclosed to the auditor at the commencement of the audit; and
    • is a genuine mistake.

    Failure to disclose a known error to the auditor at the commencement of the audit could lead to an inference that the error is not a genuine mistake.

    If the error is not a genuine mistake, neither the fact sheet nor paragraph 39 of PS LA 2002/8 Administration of penalties under the new tax system, would apply to allow the entity to correct the mistake in the next BAS. Different penalty consequences would also follow.

    At the commencement of each audit, the auditor will always offer the entity the opportunity to make a voluntary disclosure of any underpayment of GST. We expect that when the audit commences, the entity will immediately notify the auditor of the error and of the resulting underpayment of GST. Additionally, we expect that the entity will be able to produce evidence of its prior discovery of the error and of its intention to correct the error in the next BAS. This evidence may take the form of a journal entry in its books of account that showed a correction of the error. This must be entered into the accounting system prior to notification from the ATO of audit action. The auditor would also need assurance that the accounting system had transaction audit logs that cannot be altered or turned off.

    For transactions during the second year of the GST

    The auditor will apply the terms of paragraph 39 in PS LA 2002/8 and allow the entity to make the adjustment in the next BAS. There will be no penalty or general interest charge applied. The terms of paragraph 39 of PS LA 2002/8 mean that this applies whether a known error is disclosed by the entity at the commencement of the audit or a previously unknown error is discovered by the auditor during the course of the audit.

    For transactions after the second year of the GST

    Subject to any later Law Administration Practice Statements covering penalties after the second year of GST, where the error arises from a genuine mistake the entity will have taken reasonable care. There will not be any penalty applied if this is disclosed at the commencement of the audit. Paragraph 39 of PS LA 2002/8 will not apply so that the auditor would make the adjustment in the BAS in which the underpayment of GST occurred and general interest charge would apply.

    In either circumstance, where the error is considered not to be a genuine mistake, the general rules of voluntary disclosure would apply. Where an entity makes a voluntary disclosure before being told that a tax audit is to be conducted, the penalty determined based on the behaviour of the entity is reduced by 80%, or to nil if the shortfall amount is less than $1,000. If the voluntary disclosure is made after the commencement of the audit, the penalty is reduced by 20%. These reductions are not remissions but are the penalty amounts specified in Subdivision 284-D of Schedule 1 to the Taxation Administration Act 1953. The general interest charge would apply.

    22.3 Correcting GST mistakes

    The introduction to the Correcting GST mistakes fact sheet notes that the fact sheet does not apply to 'adjustments'.

    If that statement is meant to say that an adjustment is not in itself an error but a happening that has its own GST attribution consequences, the note is understandable.

    However, the question is whether errors that result from the failure to attribute increasing or decreasing adjustments to their required tax periods can be remedied in the current Business Activity Statement (BAS) provided that the errors are within the thresholds notified in the fact sheet?

    ATO response

    The Correcting GST mistakes fact sheet allows an entity to correct a GST error or omission on a later BAS where the conditions of the fact sheet are met. The fact sheet states that it does not apply to 'adjustments' as defined in GST law, merely errors or omissions.

    GST adjustments are necessary because in some situations an entity will have accounted for GST or input tax credits but subsequent events mean that GST or those input tax credits were incorrectly accounted. The entity would have paid too much or too little GST, or received too much or too little input tax credits. An adjustment can be either an increasing adjustment (which increases an entity's net amount) or a decreasing adjustment (which decreases an entity's net amount).

    An adjustment can arise from an adjustment event, bad debts or changes in an entity's extent of creditable purpose. For example, a change in the agreed price of a supply or returning a good to its supplier will lead to an adjustment under GST law.

    This adjustment is attributable to the tax period in which the entity becomes aware of the adjustment. However, if an entity accounts for GST on a cash basis and the adjustment is from an adjustment event in which the entity is liable to provide consideration, then the adjustment is only attributable to the extent the consideration is provided.

    If an entity has a decreasing adjustment arising from an adjustment event, the entity cannot attribute the adjustment until it holds an adjustment note.

    As stated in the fact sheet, the fact sheet does not apply to 'adjustments' as defined in GST law. An adjustment itself is not considered to be an error or omission but something else that is covered by the rules in the GST Act with its own GST attribution consequences.

    Where an entity by error or omission does not attribute an adjustment to the tax period in which it was attributable under GST law, it would ordinarily need to amend the BAS for that tax period to take account of the adjustment. However, the Correcting GST mistakes fact sheet allows entities who meet the conditions of the fact sheet to correct errors or omissions on their current BAS, or, in some circumstances, on a later one. Omitting a GST adjustment from a BAS that was attributable to the tax period in which the BAS relates to may be considered to be an error or omission to which the entity is able to correct the mistake using the fact sheet, assuming the entity meets the other conditions of the fact sheet.

    Consequently, errors that result from the failure to attribute increasing or decreasing adjustments to their required tax periods can be remedied in the current BAS provided that the errors are within the conditions notified in the fact sheet.

      Last modified: 22 May 2014QC 28063