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  • Reviewing and documenting decisions

    The choice of method you make is open to scrutiny through internal governance processes, external audit or ATO enquiry. It is therefore important that the decision-making process you follow should include a review mechanism that tests the robustness of the chosen method, the evidence that it is fair and reasonable and the documentation that demonstrates you have made the right choice.

    It is preferable, where possible and practicable, that the review of the method and reasons for its choice should be undertaken by someone other than the original decision-maker. The review process should be one which examines the decision and the documented reasons for decision, taking account of all the guidance identified in this document.

    The review process should also consider the quality and degree of confidence in the information and evidence supporting the decision-making process. The following scale may assist.

    Scale for testing methodology

    Low Quality

    1

    Medium quality

    2

    High quality

    3

    No analysis and documentation on business activity and use of acquisitions

    Limited analysis and documentation on business activity and use of acquisitions

    Sound and detailed analysis and documentation on business activity and use of acquisitions

    No analysis and documentation of business structures and internal cost allocation methods

    Limited analysis and documentation of business structures and internal cost allocation methods

    Sound analysis and documentation of business structures and internal cost allocation methods

    No comparables used

    Broad, inexact comparables used

    Comparability undertaken with reasoned commentary

    No assessment of distortive factors or irrelevant data inclusion

    Limited assessment of distortive factors or irrelevant data inclusion

    Full and detailed assessment of distortive factors or irrelevant data inclusion

    No reasoned and documented judgment on fair and reasonable

    Limited reasoning and documentation of judgment on fair and reasonable

    Fully reasoned and documented judgment on fair and reasonable

    Assurance

    After you have applied the methodology outlined here, you may seek clarification that your intended methodology is fair and reasonable. You can do this by applying for a private binding ruling. If you apply, it would be helpful to include the answers to questions listed in Assessing whether the method is fair and reasonable.

    See also:

    GST governance and record keeping

    We are seeking assurance that financial suppliers are correctly reporting their GST payable and GST credits claimed.

    When you keep good records we can more efficiently reach assurance that you are reporting correctly.

    We are setting clear expectations about GST governance and the records financial suppliers need to keep in relation to priority issues we have identified under our Financial Services and Insurance strategy.

    See also:

    Your tax governance framework

    When we review your compliance for GST, we will be considering whether you have a tax governance framework in place to mitigate tax risks. The framework must be appropriate for the size and complexity of your business and you must be able to explain:

    • your calculations
    • your estimates
    • your choices
    • any election you made.

    Evidence you may need to provide

    We may look for evidence that:

    • the roles and responsibilities of different parts of your business are defined
    • controls are in place at the board, managerial and operational levels, including oversight of non-tax functions that are critical to tax outcomes (for example, offshore resources and information technology) – this is explained further in our Tax risk management and governance review guide
    • sign-off procedures are undertaken by someone other than the original decision maker – for example, in apportionment methodology, requiring internal or external verification to assess the robustness of your positions
    • you ensure the integrity of the tax positions you've adopted, such as by
      • monitoring changes in tax law or administrative updates
      • documenting the technical analysis you have undertaken to form your views
       
    • you use appropriate systems and processes to meet your GST obligations, including methods for determining the extent of creditable purpose for acquisitions – for example, system account codes or allocation tables to classify transactions appropriately and identify reduced credit acquisitions
    • staff are adequately trained in these systems and processes, through regular refresher training and access to training manuals
    • processes are in place to review your tax positions regularly or when there are significant changes to your circumstances (for example, review of your apportionment methodology to ensure it remains fair and reasonable).

    The above list is not intended as prescriptive advice. The exact records you need to keep will depend on the size, complexity and nature of your business.

    Priority issues

    The priority issues we are focusing on for governance and record keeping include:

    Determining the extent of creditable purpose

    To determine the input tax (GST) credits you can claim, you need to estimate the extent of creditable purpose for your acquisitions and importations you make. The requirement that the estimate is fair and reasonable is a prerequisite for any decision you make.

    Division 11 requires a factual enquiry into the relationship between your acquisitions and supplies, so it's critical you appropriately document how you have determined that acquisitions have a relevant relationship for this purpose.

    To demonstrate that you have correctly determined your entitlement to GST credits under Division 11, we may ask for records that:

    • provide a detailed description of the nature of your acquisitions and the supplies made by your business, including tax invoices, contracts and other relevant documentation
    • describe your conceptual model to identify the relationship between acquisitions and supplies, including the systems processing, tax coding if any, cost centre or product allocation methods you use (for example, process maps that show how the supply or acquisition flows through your system and explain how it is captured, processed and settled).

    Your records must also explain:

    • your process for identifying the relationship between acquisitions and supplies to determine the extent of the creditable purpose
    • why the method you are using provides a fair and reasonable estimate of the intended use of your acquisitions
    • if using a single ECP rate across the business, why that is appropriate in your circumstances
    • how the drivers that you use reflect the intended use of your acquisitions and how you tested whether it was fair and reasonable in your circumstances
    • the circumstances where treatment of an acquisition varies from the treatment applied to other acquisitions across the cost centre or business, and why the different treatment is fair and reasonable (for example, fully creditable acquisitions being directly allocated, with all other acquisitions being apportioned)
    • why it is appropriate to use different methods across your business and why it is fair and reasonable to take this approach
    • how your processes to determine the GST treatment of supplies and acquisitions interact with your accounting systems and confirm that you use the information available in those systems - for example, your records may need to explain
      • why you are using a method that does not align with your natural or existing accounting or cost management systems
      • why you did not use these existing systems
      • why using these systems would not produce a fair and reasonable outcome
       
    • the process you've taken to identify and exclude factors that could distort your apportionment method such as
      • if a revenue formula is used this may require non-monetary consideration to be recognised
      • whether material one-off transactions are appropriately treated
       
    • the steps you take to identify when an adjustment arises because the actual use of your acquisition differs from your intended use
    • the steps you take to ensure your method continues to be fair and reasonable in your circumstances such as
      • regularly updating any sample data used to inform inputs to your apportionment method, to ensure your method reflects the intended use of your acquisitions
      • testing the assumptions behind the methodology if your business changes
      • comparing your method to other methods reasonably available to you
       
    • any changes in your apportionment methodology and the reasons for those changes (for example, you may provide a comparative analysis of your revised method and your previous methods).

    Practical Compliance Guideline (PCG) 2017/15: GST and customer owned banking institutions is intended to remove complexity and to minimise compliance costs for customer-owned banking institutions in meeting their GST obligations. If you rely on this PCG to apply the 18% rate as your extent of creditable purpose, your records must show that you meet the requirements to apply this PCG.

    We may have concerns if you estimate:

    • that your acquisitions are partly creditable and include them in an apportionment method, without first considering whether they have no creditable purpose because they only relate to input taxed supplies you make
    • the extent of creditable purpose for acquisitions using an indirect method when direct methods are available to you (for example, where you allocate acquisitions to an overhead category using an indirect method, when instead you could have used information you hold to allocate acquisitions to specific products using a direct method).

    You should focus on whether there is sufficient information to enable us to ensure that your method is fair and reasonable in your circumstances.

    We expect that your processes, including apportionment methods:

    • can be explained
    • are supported by a good conceptual model
    • comply with record keeping requirements.

    If your apportionment method is overly complex, difficult for you to explain, or is not appropriately documented, it may be difficult for us to gain assurance that the method is fair and reasonable. The information for the apportionment method must be easily understood and supporting information must be readily available.

    See also:

    Reduced credit acquisitions

    To demonstrate you are correctly identifying reduced credit acquisitions and calculating your entitlement to reduced GST credits, we may ask for records to show:

    • a detailed description of the nature of your acquisitions that you have identified as reduced credit acquisition, including tax invoices, contracts and other relevant documentation.
    • your reasoning in distinguishing between mixed and composite acquisitions when determining if you are entitled to
      • a reduced GST credit on your acquisitions
      • the extent of that entitlement
       
    • the process you use to determine whether acquisitions qualify as reduced credit acquisitions, including which supply the acquisition relates to and how the system is able to identify it as a reduced credit acquisition
    • the controls you have in place to ensure you correctly calculate your entitlement to input tax credits and reduced input tax credits (for example, you should be able to explain your reasons for deciding an acquisition has a partly creditable purpose and qualifies for a reduced GST credit).

    See also:

    • GSTR 2004/1: Goods and services tax: reduced credit acquisitions

    Reverse charge for recipients of cross-border supplies

    We are seeking assurance that you are correctly identifying and treating situations when you need to pay GST on cross-border supplies you receive, because of the reverse charge in Division 84 of the GST Act.

    We may ask for records that show:

    • the steps you take to identify cross-border supplies you receive where you need to pay GST under the reverse charge – in particular, any supplies you receive that are subject to the reverse charge under the 1 October 2016 changes to the GST law
    • details of any apportionment method used for determining entitlement to GST credits or reduced GST credits
    • you have appropriately treated related-party cross-border charges (such as those under cost recharge and profit sharing arrangements) for GST purposes.

    See also:

    Rights for use offshore

    We are seeking assurance that you are correctly applying the principles in the Travelex decision when determining whether supplies you make are GST-free because they are made in relation to rights for use offshore.

    • We may ask for records that show:
    • the basis upon which you have determined that your supply is a supply made in relation to rights, including any contractual evidence
    • the process you followed to determine the GST treatment of supplies you make, including how you came to the position those particular supplies are GST-free (or partly GST-free), and provide evidence to support that decision.
    • the process you followed and the evidence used to develop proxies needed to estimate the anticipated use of the rights outside Australia, with your reasoning for why these proxies provide a fair and reasonable estimate of the extent to which the supply is GST-free
    • how you determined the extent particular supplies are GST-free and how this is reflected in your apportionment methods.

    See also:

    • GST 2017/1: Goods and services tax: when is the supply of a credit card facility GST-free under paragraph (a) of Item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
    • GSTR 2003/8: Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)

    Significant or unusual transactions

    We expect you to have governance processes that manage the tax risks involved in significant or unusual transactions, and we may ask you for evidence of:

    • your policy for seeking advice from internal or external experts or engaging with the ATO if a transaction is
      • contentious
      • highly technical
      • complex
      • significant
      • unusual for your business
       
    • your processes for training staff to identify unusual or significant transactions, escalate issues and ensure these transactions are treated correctly for GST purposes
    • your reporting processes for monitoring and reviewing significant or unusual transactions.

    If you use an indirect estimation method to allocate and apportion acquisitions, you should consider how to treat significant and unusual transactions. Applying an indirect estimation method to acquisitions associated with significant and unusual transactions may distort the method. For example, this could be the case where:

    • you can directly allocate the acquisitions to the making of particular supplies
    • the relationship between the acquisitions and your activities are materially different to those estimated using your apportionment method.

    See also:

      Last modified: 30 Jul 2019QC 17480