• Input Tax Credit estimators

    What is an Input Tax Credit estimator?

    An Input Tax Credit (ITC) estimator is our general term for any methodology used to estimate GST credits for unprocessed tax invoices (tax invoices that you hold that haven't been processed in your accounting system at the end of a tax period – or in time for activity statement lodgment).

    There are various ITC estimator methodologies. They all rely on data to calculate an estimate, average, or percentage of GST credits for the unprocessed tax invoices of a business for a tax period.

    ITC estimators are generally used by large organisations that have the necessary governance, processes, and systems in place to ensure that the ITC estimator is used and reviewed appropriately.

    What are the risks associated with using an ITC estimator?

    We strongly encourage you to assess all of the risks associated with the use of ITC estimators.

    An ITC estimator raises the complexity of your accounting arrangements and increases the risk that you'll over-claim your GST credits. As a result, you're more likely to be reviewed by us.

    Your compliance costs may increase if you use an ITC estimator. This is because in addition to undertaking regular reviews of your ITC estimator methodology, you may also have to make revisions to your activity statements for tax periods where you have over-claimed your GST credits.

    An ITC estimator will adversely impact your business’ risk profile with us if you don't have appropriate controls and strong governance in place.

    If you use an ITC estimator you may be subject to penalties and general interest charge (GIC).

    Penalties and GIC

    You may be subject to penalties and GIC if we undertake a review and it's identified that you have made a false or misleading statement, and/or you aren't able to demonstrate that you hold valid tax invoices for the GST credits claimed in your activity statement.

    Where you and/or your agent fail to take reasonable care in preparing and lodging your activity statement, and this results in a false or misleading statement – we'll review the behaviour of you and your agent leading up to the lodgment of that activity statement to determine penalties.

    When considering your behaviour for penalty purposes, we'll apply an objective test to determine whether your ITC estimator produces an accurate estimate of your GST credit entitlement for unprocessed tax invoices.

    If on an objective assessment, your ITC estimator is likely to, or does produce an inaccurate estimate – this would be a strong sign that your behaviour in the preparation of your activity statement, demonstrates a lack of reasonable care, recklessness or intentional disregard of the law.

    A failure to implement appropriate governance and internal controls, to conduct regular reviews of your estimate, or to take steps to minimise GST credit over-claims, would be a strong sign that your behaviour demonstrates a lack of reasonable care, recklessness or intentional disregard of the law in the preparation of your activity statement.

    See also:

    Using an ITC estimator – key actions

    Notify us by emailing ITXIBSRisk@ato.gov.au if you're already using, or are about to start using, an ITC estimator. This notification doesn't constitute a voluntary disclosure for the purpose of determining penalties. Notification doesn't exclude you from our reviews of your use of an ITC estimator.

    Regularly review the accuracy of your ITC estimator methodology. It isn't appropriate to use a ‘set and forget’ approach.

    As part of this regular review, reconcile the estimated GST credit claim against your actual entitlement to GST credits for each tax period that you have used an ITC estimator.

    You should implement appropriate systems, controls and robust governance. Ensuring the calculation and use of the ITC estimator complies with any relevant accounting standards.

    See also:

    Reviewing your ITC estimator

    We expect you to review your ITC estimator (at a minimum):

    • every six months
    • at any time where there is a material event or change to the business (significant expenditures, seasonal variations, business system changes or business re-structuring).

    In your review, you should:

    • assess the appropriateness of your ITC estimate going forward
    • reconcile your estimated GST credit claims against your actual GST credit entitlements for each of the tax periods since your last review.

    Assessing your ITC estimate going forward

    When assessing the appropriateness of your ITC estimate going forward, you should (where relevant):

    • Consider your future business outlook including financial forecasts, major contracts and other economic conditions. It isn't enough to just rely on past data.
    • Ensure significant expenditure and seasonal variations are taken into account. For example – if the expenditure varies significantly due to seasonal trends, you should take a conservative approach in order to reduce the risk of over-claiming GST credits. Your ITC estimate calculation should be based on the month with the lowest delayed GST credits, rather than using an average. Alternatively, you may vary the estimate at relevant tax periods to reflect the seasonal variations – including year-end processing.
    • Make adjustments for material changes in business operations. For example – the expenditure patterns of a mining business may shift as the mine moves from the development phase to its commissioning and operation. We would expect the methodology to be adjusted to take into account changing patterns and types of expenditure at each phase. Although expenditure may increase in some phases, that expenditure may be on acquisitions that aren't subject to GST.
    • Ensure the methodology takes account of any material downturns in business activity.
    • Ensure you have robust governance and controls in place to monitor the appropriateness of your estimate, minimising the chance of an over-claim.

    This isn't an exhaustive list. You may need to consider other factors when assessing the appropriateness of your estimate, to avoid over-claiming your GST credits.

    See also:

    Reconciling your estimates of GST credits

    For each tax period under review, you must compare your total GST credit entitlement to the amount of GST credits that you claimed using your ITC estimator. This will show that you have either claimed more or less GST credits than your actual entitlement, and will determine what corrective action (if any) needs to be taken on your activity statement for that particular tax period.

    When conducting your reconciliation of multiple tax periods, it isn't appropriate to compare the total over-claims against under-claims to arrive at a net adjustment figure. Each tax period is discreet and must be reconciled separately.

    What corrective action do you need to take?

    Under-claims

    In most cases where you have under-claimed your GST credits in a tax period, you won't need to take any corrective action on any activity statement. This is because the GST credits will have been processed and taken into account in the activity statements for following tax periods. Once the GST credits have been taken into account (in later tax periods) it isn't possible to take them into account in an earlier tax period.

    The exception to this is where you haven’t lodged a subsequent activity statement when you became aware of an under-claim. In this case you may amend the original activity statement.

    Over-claims

    In most cases where you have over-claimed your GST credits, you must amend your original activity statement to reduce the net amount by the over-claim.

    The exception to this is where you meet the conditions in GSTE 2013/1 Goods and Services Tax: Correcting GST Errors Determination 2013 (the Determination).

    Correcting GST errors

    If the error satisfies the conditions in the Determination you may be able to make a correction to your current activity statement.

    The Determination explains that there are two types of GST errors you can make – a credit error and a debit error.

    Credit errors

    You make a credit error if you make a GST error in working out your net amount for a reporting period that would have – if it was the only mistake in the reporting period – resulted in you reporting or paying too much GST. Claiming a GST credit on a later activity statement because you failed to claim it in an earlier activity statement is not a credit error.

    An under-claim as a result of using an ITC estimator is not a credit error for the purposes of the Determination. This is because under-claims are automatically claimed (taken into account) in following activity statements once the relevant tax invoices are processed.

    Debit errors

    You make a debit error if you make a GST error in working out your net amount for a reporting period that would have – if it was the only mistake in the reporting period – resulted in you reporting or paying too little GST.

    An over-claim as a result of using an ITC estimator is a debit error for the purposes of the Determination. You may be able to correct this error in a following activity statement if you meet the requirements of the Determination.

    Amongst other things, the Determination requires that a debit error comes within time and value limits. The net sum of debit errors is one or more debit errors less any credit errors you choose to include or correct in a following activity statement. As explained, under-claims of GST credits as a result of using the ITC estimator are not credit errors and can't be used to offset your debit errors.

    If a debit error or net sum of debit errors is below your value limit, you can correct the errors in a following activity statement. If a debit error or net sum of debit errors exceeds your value limit, you can still correct the errors up to the value limit in a following activity statement. The balance (excess over the value limit) of the errors will need to be corrected in the original activity statement (see worked example for practical application).

    You can't use the Determination to correct a debit error in some situations, including where the error is a result of recklessness or intentional disregard of a GST law.

    Worked example

    Zebra Pty Ltd (Zebra) lodges monthly activity statements and has a GST turnover of $500 million. Zebra commences using an ITC estimator in July 2016.

    Zebra estimates that the GST credits for its unprocessed tax invoices are $1.5 million per month. It claims this additional amount (the ITC estimate) in its activity statement for July 2016. The ITC estimate balance is $1.5 million.

    In February 2017, Zebra undertakes a review of its ITC estimator to assess the appropriateness of its $1.5 million estimate going forward. As part of this review, Zebra also reconciles its estimated GST credit claims against its actual GST credit entitlements for the tax periods from 1 July 2016 until 31 December 2016.

    Where Zebra identifies that it has an over-claim that it cannot correct in a later tax period using the Determination – it must make a revision to the original activity statement for that tax period. When this occurs, they must also reduce their ITC estimate balance by that amount for following tax periods.

    In later tax periods, Zebra will compare this (or any following) reduced ITC estimate balance to their actual GST credit entitlement for the relevant tax period. This is to determine the amount of any over-claim or under-claim.

    The table below illustrates over-claims and under-claims identified by Zebra as part of the reconciliation. It explains what corrections or revisions Zebra can make, and any impacts on the balance of the ITC estimate.

    Tax period

    Over claim (debit error) ($)

    Under claim (not a credit error) ($)

    Correction/ revision

    Reason

    ITC estimate balance for calculating subsequent tax period over/under-estimates ($)

    Jul-16

     

    100,000

    No correction or revision needed.

    Will be claimed in subsequent AS when invoices are processed.

    1,500,000

    Aug-16

    50,000

     

    Zebra chooses to correct this $50,000 debit error in Feb 17 AS.

    On review in Feb 17, the net sum of the debit errors in the period Jul 16 to Dec 16 is $200,000. Zebra’s debit error value limit is $80,000.There are no credit errors to offset. Zebra can correct up to $80,000 of its total net debit errors for Jul 16 to Dec 16 in Feb 17. Zebra corrects the $50,000 debit error for Aug 16 in the Feb 17 AS.

    1,500,000

    ITC estimate balance remains the same as Zebra chooses to correct $50,000 debit error in the Feb 17 AS. No change is made to the Aug 16 AS.

    Sep-16

    50,000

     

    Zebra chooses to correct $30,000 of this $50,000 debit error in Feb17 AS. Sep 16 AS must be revised for the remaining $20,000.

    The debit error value limit of $80,000 is now exceeded by the $50,000 error in Augand $30,000 error in Sept 16 AS. The remaining $20,000 debit error must be revised in the original Sep 16 AS.

    If applicable, GIC and penalties are assessed from the due date for lodgment of the Sep 16 AS.

    1,480,000

    ITC estimate balance is reduced by $20,000 because original Sep 16 AS was amended by this amount.

    Oct-16

     

    150,000

    No correction or revision needed.

    Will be claimed in subsequent AS when invoices are processed.

    1,480,000

    Nov-16

     

    100,000

    No correction or revision needed.

    Will be claimed in subsequent AS when invoices are processed.

    1,480,000

    Dec-16

    100,000

     

    Zebra must correct this error by revising the Dec 16 AS.

    The debit error value limit of $80,000 was exceeded by errors in Aug and Sept 16 AS. The Dec 16 AS must be revised to correct the debit error of $100,000. Zebra cannot correct any of this debit error in the Feb 17 AS.

    If applicable, GIC and penalties are assessed from the due date for lodgment of the Dec 16 AS.

    1,380,000

    ITC estimate balance is reduced by $100,000 because original Dec 16 AS was amended by this amount.


    After making the revisions outlined in table above, the balance of Zebra’s ITC estimate at the end of December 2016 is $1.38 million (the original $1.5 million estimate reduced by the revisions of $20,000 in September 2016 AS and $100,000 in December 2016 AS).

    For the tax periods commencing 1 January 2017, the ITC estimate of $1.38 million will be used for reconciliations.

    Zebra is required to reduce label 1B by $80,000 in the February 2017 activity statement. This is because they chose to rely on the Determination to correct debit errors of $50,000 and $30,000 from the August and September 2016 tax periods respectively.

    Determining the appropriate ITC estimate for the next 6 months

    As part of its 6 monthly review, Zebra assesses the appropriateness of its ITC estimate for the next 6 months.

    Scenario 1: Decrease in estimate

    Zebra reviews their ITC estimator methodology taking into account their future forecasts, and determines that the appropriate ITC estimate for the next 6 months from February 2017 is $1.2 million.

    Zebra already has an $80,000 correction to be made by reducing label 1B in the February 2017 activity statement. Therefore, to change the ITC estimate from $1.38 million to $1.2 million, they will decrease label 1B in the February 2017 activity statement by a total of $180,000 ($100,000 decrease for the estimator forecast and an $80,000 decrease for the debit error correction for the August and September 2016 tax periods).

    Scenario 2: Increase in estimate

    Zebra reviews their ITC estimator methodology taking into account their future forecasts. They determine that the appropriate ITC estimate for the next 6 months from February 2017 is $1.7 million.

    Zebra already has an $80,000 correction to be made by reducing label 1B in the February 2017 activity statement. Therefore, to change the estimate from $1.38 million to $1.7 million, they will increase label 1B in the February 2017 activity statement by a total of $320,000. The decrease of $80,000 at label 1B (to correct the errors from the August 2016 and September 2016 tax periods) is no longer needed, because the correction is negated by the revised estimate.

    Last modified: 25 May 2017QC 52240