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  • Information brief: ITC estimators

    Background

    This information brief outlines the ATO view on the use of Input Tax Credit (ITC) estimator methodologies (Estimators)1,and provides observations and concerns identified through recent client engagements.

    The Commissioners view

    Clients using Estimators are required to undertake reviews to reconcile the estimated ITCs and their actual entitlement to ITCs for each tax period, and to re-evaluate the appropriateness of the estimate moving forward.

    Reviews need to be done (at a minimum):

    • every six months
    • where there is a significant event or change to the business.

    In those tax periods where the amount reported in a BAS based on an estimate was:

    • Over-estimated (more than the client’s actual entitlement to ITCs), the BAS for these tax periods must be amended to reduce the net amount by the over claimed ITCs.
      • Unless the client can rely on the Correcting GST Errors Determination (GSTE 2013/10)2.
      • Under the Commissioner’s view penalties and GIC (including remissions) may apply.
       
    • Under-estimated (less than the client’s actual entitlement to ITCs), the under-estimated ITCs would have been processed in later tax period(s) and therefore taken into account in a subsequent BAS.
      • In these circumstances, clients are not entitled to amend their BAS for those periods where they have under-estimated their entitlement to ITCs (i.e. previous BAS).
       

    What we are concerned about

    The ATO recommends that caution be taken in using Estimators, and notes the following behaviours of concern:

    • In setting Estimators clients fail to adequately consider their future business outlook, including financial forecasts, increasing the risk of over-estimates occurring in tax periods that the Estimator is being used.
    • The use of averages in setting estimators results in clients’ Estimators being set too high.
    • Clients using an Estimator have insufficient governance and controls in place to monitor the appropriateness of their estimation, which often results in over-claims.
    • Clients are not undertaking a review on a six monthly basis.3
    • Clients are incorrectly revising over-claimed ITCs in their next BAS rather than revising each tax period where there has been a shortfall.
    • Reviews are generally inadequate as they do not identify where there has been an over claim of ITCs for specific tax periods. Instead, these reviews focus on the appropriateness of the estimation for future tax periods.

    Next steps

    • The ATO will be issuing public advice and guidance on the use of Estimators.
    • Consultation will be undertaken with relevant stakeholders in developing the product.
    1 See the current ATO guidance ‘Using ITC estimators to claim GST credits’2 ITCs that have not been included in the disclosures in the originally lodged BAS (i.e. under-estimated amounts) are not within the definition of 'error' for the purposes of GSTE 2013/1.3 The current ATO guidance states that a review/verification process 'must occur on a regular basis (at least semi-annually)'.
      Last modified: 20 Dec 2016QC 50772