The following case studies show the importance of systems integrity to correct GST reporting.
Case study 1
Shop&Shop Ltd operate a large wholesaling business and regularly make large, one-off transactions that are processed through a purpose-built accounting and inventory management system, often with limited manual intervention.
At the end of last financial year, they experienced a sizeable, unexpected cash flow reduction which placed substantial strain on the business. Shop&Shop Ltd conducted an internal investigation, including a review of their accounting and inventory management system and processes, and found a coding error in their system was incorrectly identifying transactions between their branches as taxable.
As a result of this error the business found they had overpaid around $1.8 million in GST over an 18-month period, which they were able to claim back as a refund of overpaid GST from the ATO.
Shop&Shop Ltd modified their systems to correct the coding error and established an additional manual checking process for large, one-off transactions. They undertook to regularly review their systems, and to periodically test they have adequate system controls in place.
Case study 2
Citybreak trades in the hospitality industry in a large capital city. The business relies heavily on point of sale (POS) systems to capture GST reporting information.
An ATO review of activity statements identified Citybreak had over-claimed GST credits and under-reported the GST payable on a number of transactions.
This had occurred because POS systems were not set-up correctly to classify and report the types of transactions the business was making, and because they did not have adequate control procedures in place to review and assure the integrity of information being used and reported by the systems.
The types of errors identified during the review included:
- incorrect classification of items sold over-the-counter because of coding errors introduced when the POS system was originally set-up
- omission of GST payable on over-the-counter meals
- taxable sales not accounted for and records incomplete as a result of a change in POS terminal set-up
- incorrect system classification of takeaway sales.
As a result of these errors, Citybreak understated their GST by $360,000 over four years. In addition to the GST shortfall, Citybreak was required to pay penalties and interest. To avoid this additional cost to their business in future, Citybreak worked to correct their POS systems, established new control procedures, and committed to review their systems and procedures periodically.
Case study 3
Fiaxo, a manufacturing company, participated in an ATO review of their activity statement reporting. The process identified a range of business system and process issues which had been contributing to errors in their GST reporting, including:
- GST reports not reconciled to the GST general ledger accounts
- procedures not documented for processing accounts payable/accounts receivable, and for preparation of business activity statements
- insufficient procedures in place for processing sales invoices (resulting in sales omitted from activity statements)
- purchases paid on behalf of related entities included incorrectly on activity statements
- using incorrect tax codes resulting in incorrect GST treatment.
Fiaxo introduced system modifications to address these issues in real time as the review progressed and instigated a further internal examination of systems and processes. Despite having to pay some GST shortfall as a result of the review, Fiaxo was confident the outcome resulted in better business systems and processes, ensuring it was unlikely they would be in the same situation again.