Top 1,000 GST assurance

Overall levels of assurance

The Top 1,000 population is the largest contributor to GST and makes up about 38% of the total net GST collections. We have completed 602 reviews for GST through 2 Top 1,000 programs:

• the GST streamlined assurance program (program ended 30 June 2023), and
• the combined assurance reviews.

We have recently implemented changes to our approach for obtaining GST assurance. Historically, the GST component in the combined assurance review was risk based and we did not provide an assurance rating for GST. Our observations outlined in this report are consistent with what we have observed in the prior combined assurance reviews where no GST assurance rating was provided (as a GST risk approach was adopted).

From April 2022, GST assurance is now obtained through our expanded combined assurance review rather than a standalone GST streamlined assurance review. In the expanded combined assurance review, the income tax and GST specialist teams work collaboratively to review a taxpayer to obtain assurance over income tax and GST. We provide the taxpayer with separate assurance ratings for income tax and GST.

The primary change when expanding the combined assurance review to include GST assurance relates to the GST Analytical Tool (GAT) becoming a compulsory element for taxpayers not predominantly making input taxed supplies. We use the GAT, combined with transaction testing, to provide assurance, identify key risk areas and assess whether GST is correctly reported. For taxpayers predominantly making input taxed supplies, such as those in the financial services sector, we continue to undertake data and transaction testing to provide assurance for GST instead of the GAT.

We have completed 193 reviews in the GST streamlined assurance reviews and 355 reviews in the combined assurance review program which included GST (but did not provide an assurance rating). Since the delivery of the expanded combined assurance review, a further 74 combined assurance reviews have been completed which provide assurance ratings for GST.

As a consequence of primarily undertaking combined assurance reviews we have, for GST assurance, reviewed 15 taxpayers for a second time. This arose due to the need to align the assurance reviews for income tax and GST. In these circumstances, we leveraged from the knowledge obtained in the GST streamlined assurance reviews.

When determining assurance ratings, we consider whether enough objective evidence has been obtained that would lead a reasonable person to conclude the taxpayer reported the right amount of GST according to the law. The overall level of assurance is based on an assessment, having regard to objective evidence, of whether the taxpayer is considered to have reported the right amount of GST.

We review the 4 focus areas with a strong focus on the GST governance and control framework. These GST governance frameworks and controls are fundamental to the correct reporting of GST. We often see the correlation between poor governance and inadvertent or system errors that result in GST reporting mistakes and GST lodgment revisions.

The majority of taxpayers are achieving a medium or high assurance overall rating for GST. However, we are seeing over 40% of taxpayers making voluntary disclosures when they are notified of a GST review or during the review. We are also seeing that some taxpayers are providing more than one disclosure for the same issue or different issues. We expect taxpayers to be reviewing their GST outcomes regularly as part of good governance and not waiting until they are notified of an assurance review.

Where a voluntary disclosure has been made, we look to ensure that the system or processes that have led to the error have been updated to ensure the risk of the error occurring again has been mitigated. The overall assurance outcome may be impacted if the reason for the error has not been addressed by the taxpayer.

Ratings

We apply consistent rating categories when considering our overall level of assurance.

Ratings categories for overall levels of assurance on GST

Colour indicator	Rating	Category description
	High	We obtained assurance that the taxpayer paid the right amount of GST for the scope and period of this review. This means we are unlikely to contact you again in relation to the scope and period reviewed unless something new comes to our attention.
	Medium	We obtained assurance in relation to some but not all areas within the scope reviewed. For those areas not yet assured, further evidence and/or analysis will be required before we obtain assurance that the taxpayer paid the right amount of GST.
	Low	We have specific concerns around the taxpayer’s compliance with the GST laws and the amount of GST paid relevant to the period and scope of this review.

To date 31% of taxpayers have obtained an overall high assurance outcome as at their most recent review. This is an increase from last year's results where 26% of taxpayers obtained an overall high assurance for GST (see Graph 11).

In the last 12 months we have completed 94 assurance reviews and 35% of those taxpayers have obtained overall high assurance for GST. 60% of taxpayers obtained a medium assurance rating, and 5% obtained a low assurance rating.

A stage 2 rating for governance is required to obtain an overall high assurance rating. Whilst we have observed an increase in the number of taxpayers obtaining a stage 2 for governance and a high overall assurance rating, the majority of taxpayers reviewed achieved a medium assurance rating primarily as a result of obtaining a stage 1 rating for GST governance.

4% of taxpayers reviewed obtained an overall low assurance rating, which remains relatively constant from previous years. The low assurance overall often corresponds with an absence of evidence of an effective tax governance framework. These taxpayers usually also have only stage 1 ratings or red flag ratings for GST governance, and generally a low assurance rating for the GAT and/or a number of specific GST risks with red flag ratings.

Graph 11: Overall assurance ratings for all GST assurance reviews in their most recent review, as of 30 June 2023

Overall assurance rating for reviews completed by industry

Graph 12 shows overall assurance ratings for the entire population. High assurance ratings are greater for the manufacturing, construction and agriculture industry, with lower levels of high assurance in the banking, finance and investment, superfunds and insurance industry.

Graph 12: Overall GST assurance ratings by industry split for all GST assurance reviews as at their most recent review, as of 30 June 2023

Note that the graph shows the overall assurance ratings by the number of taxpayers for the following key industry groupings:

• manufacturing, construction and agriculture (MCA)
• financial services (FS) (banking, finance and investment, superfunds, and insurance)
• wholesale, retail and services (WRS)
• mining, energy and water (MIN).

Tax risk management and governance

Tax risk management and governance is a key focus area. As a transactional tax that is data driven, it is important that there is a strong, board-endorsed tax governance framework and that it is 'lived' in practice.

We consider the existence, design and operation of a tax control framework for GST focusing on the 8 controls set out in the GST Governance, Data Testing and Transaction Testing Guide (GST Guide)

The GST Guide provides guidance to help taxpayers conduct a self-review of their tax control frameworks for GST purposes. Our reviews focus on the following controls aligned with the justified trust objectives:

1. Board-level control 1 (BLC 1): Formalised tax control framework
2. Board-level control 3 (BLC 3): The board is appropriately informed
3. Board-level control 4 (BLC 4): Periodic internal control testing
4. Managerial-level control 1 (MLC 1): Roles and responsibilities are clearly understood
5. Managerial-level control 3 (MLC 3): Significant transactions are identified
6. Managerial-level control 4 (MLC 4): Controls in place for data
7. Managerial-level control 6 (MLC 6): Documented control frameworks
8. Managerial-level control 7 (MLC 7): Procedures to explain significant differences.

For GST, our key focus is on BLC 4, MLC 4, MLC 6 and MLC 7 as they directly impact the correct reporting of GST.

Ratings

We apply a consistent rating system when reviewing and assessing tax governance. We consider the existence, design and operation of a tax control framework for GST. During the review, we refer to the initial areas of focus set out in the GST Guide before their review starts.

Ratings

Colour indicator	Stage	Category description
	Stage 3	You provided evidence to demonstrate that a tax control framework exists, has been designed effectively and is operating effectively in practice.
	Stage 2	You provided evidence to demonstrate that a tax control framework exists and has been designed effectively.
	Stage 1	You provided evidence to demonstrate a tax control framework exists.
	Not evidenced or concerns	You have not provided sufficient evidence to demonstrate a tax control framework exists or we have significant concerns with your tax risk management and governance.

The tax governance ratings for the GST assurance reviews completed up to the end of June 2023 are set out below.

Graph 13: GST governance assurance ratings for all GST assurance reviews based on the most recent review, as of 30 June 2023

Most taxpayers (64%) have been achieving a stage 1 for GST tax governance (see Graph 13). However, we have seen an increase in the last 12 months of the percentage of taxpayers achieving a stage 2 for tax governance, increasing from 28% to 33%.

GST governance forms a significant component of the review and a key reason for a recent increase in overall high assurance ratings is due to the increase in the number of taxpayers achieving stage 2 ratings for GST governance.

Stage 1

Taxpayers that obtain a stage 1 rating for GST governance have demonstrated that controls exist but are not designed effectively. A key area of concern that results in a stage 1 rating for GST governance is where governance procedures are not adequately documented. We observe that taxpayers are able to describe their informal practices but these are not formalised or remain in draft form.

Additionally, we observe that the documentation supporting BLC 1, BLC 3, MLC 1 and/or MLC 3, which are controls that are common in their operation for both income tax and GST, encompasses income tax but not GST.

Stage 2

Taxpayers that obtain a stage 2 rating for GST governance have demonstrated that controls not only exist but are designed effectively. That is, the control is robust and adequately documented and in a final form.

Pleasingly, we have observed taxpayers achieving a stage 2 governance rating for GST where they have comprehensive documented procedures in place, particularly with controls in place for GST data, as well as the BAS preparation process.

Some of the main concerns for stage 2 for GST governance include the following.

BLC 4: Periodic internal control testing

A lack of a periodic internal control testing plan, or commitment to periodic internal control testing that extends to testing the GST controls. The plan or commitment must be signed off by the board or a delegate of the board and be sufficiently comprehensive to cover the elements outlined in the GST Guide.

MLC 4: Controls in place for data

A failure to have in place documented procedures for manual processing controls for accounts receivable and accounts payable transactions that fall outside the system, such as journal entries for transactions that have not automatically gone through a system with tax code rules.

MLC 6: Documented control frameworks

A lack of documentation for processes to undertake data and trend analysis and exceptions reporting as part of the BAS preparation process.

Further, with MLC 7, we observed that most taxpayers regularly undertake a monthly reconciliation of the BAS outcomes with the general ledger, however there is generally no reconciliation between the BAS outcomes and the audited financial statements.

Stage 3

Only 2% of taxpayers to date have obtained a stage 3 rating. To obtain a stage 3 rating for GST, we look for evidence that the documented tax control framework is both designed and operating effectively in practice.

To achieve staqe 3:

• all key justified trust controls need to exist and be designed effectively
  • Confirming continued alignment of controls prior to testing
  • Ensuring testing is conducted on an appropriate basis.
   
• all key justified trust controls need to be tested. Regard must be had to both income tax and GST when testing controls that are common in their operation for both taxes.
• testing needs to be conducted by an appropriately qualified independent reviewer
  • Examples are an internal (or external) audit, internal risk or a third party.
  • The reviewer must be independent of the tax control owner (that is, outside the tax function).
   
• we need to be provided with the outcomes of the testing including details of:
  • testing methodology
  • sample sizes selected
  • types of source documents relied upon by the tester
  • final test results
  • steps taken to address issued identified
  • board (or board delegate) acknowledgement of the test results
  • steps to be taken to address issues identified
   

This may be in the form of an outcome or findings style report. We do not require an assurance opinion report with testing in accordance with audit and accounting standards. A report that only sets out the exceptions noted in the testing will not be sufficient

• where improvements or enhancements are recommended, we will review whether these have been (or will be) implemented
• once periodic internal control testing has been completed and it has been established that the tax risk management and governance framework is designed and operating effectively, we expect that all controls would be retested within a rolling 3-to-5-year period. In limited circumstances, the retesting period may extend beyond 5 years, up to a maximum of 7 years. The frequency of retesting may vary according to the characteristics of the organisation and the outcomes of prior tax control testing.

Significant and new transactions, specific tax risks and tax risks flagged to market

We review the GST treatment of the taxpayer’s business activities, particularly significant and new transactions. We also review risks or concerns communicated to the market to determine if they are present.

Ratings

We apply a consistent rating system when assessing the GST treatment of taxpayer’s business activities.

Ratings

Colour indicator	Rating	Category description
	High	We obtained a high level of assurance that the right GST outcomes were reported in your BAS for the scope and period of this review. This means we are unlikely to contact you again in relation to these matters for the scope and period reviewed unless something new comes to our attention.
	Medium	More evidence or analysis is required to establish a reasonable basis to obtain a high level of assurance.
	Low	More evidence and/or analysis is required to determine whether a tax risk is present.
	Red flag	We have concerns there is non-compliance with the GST law.
_	Out of scope	We have not evaluated this item and not expressed a rating.

Observations

The following areas are key GST risk areas that result in corrections to returns reporting and lower assurance ratings. These may not apply to all taxpayers.

Supplies and acquisitions

A common GST risk is incorrect reporting of supplies and acquisitions from inadvertent errors. Often such errors are identified from a taxpayers’ self-review of its systems/reporting of GST and result in the taxpayer voluntary disclosing a GST shortfall for tax periods both within and outside the tax periods being reviewed. Whilst the disclosures for these inadvertent errors may not be material in dollar terms, it is important for business to have good governance and control frameworks in place that detect and remediate errors on a regular basis. The transactional nature of GST means that undetected errors can compound to material amounts unless identified and addressed. We have also received voluntary disclosures where errors have occurred in relation to one-off transactions that are not core business activities.

Specifically in relation to supplies we have observed the following:

• misclassification of taxable products as GST-free (for example, health and food products)
• attribution errors (for example, periodic/progressive supplies).
• incorrectly treating adjustment events associated with supplies made in previous tax periods (for example, the provision of volume rebates)
• incorrectly reporting supplies of providing fringe benefits to employees (for example, we have observed taxpayers merely reporting the net amount on the BAS for transactions associated with providing motor vehicles to employees.)
• exports not meeting the 60-day export rule and as a result of incorrectly classifying the goods as GST-free.

Although some errors were identified, importantly approximately 89% of taxpayers reviewed achieved high assurance for supplies, in reviews where GST was assured.

Specifically in relation to acquisitions we have observed the following:

• incorrectly treating an acquisition as creditable, such as non-deductible entertainment expenses
• incorrectly claiming input tax credits where suppliers have either no GST registration, no ABN, an invalid ABN, or a cancelled ABN
• tax coding and system setup errors
• incorrectly treating adjustment events associated with goods or services acquired from suppliers in previous tax periods (for example, the receipt of volume rebates)
• incorrectly claiming input tax credits on amounts provided to employees as an allowance.

Although some errors were identified, importantly approximately 90% of taxpayers reviewed achieved high assurance for acquisitions

With reporting GST transactions associated with the provision of motor vehicles via novated leases to employees (fringe benefits), we have observed taxpayers either:

• failing to report GST on post-tax employee contributions at all
• merely reporting the net amount on the BAS, that is, incorrectly offsetting the GST liability associated with the post-tax employee contribution component against the input tax credits available for costs associated with providing the motor vehicles to employees.

Financial supplies

Financial supplies and acquisitions arise not only in the financial services sector but also when a taxpayer not in that industry engages in mergers, demergers, company acquisitions or other similar activities. As such, there is a need to consider restricting input tax credit recovery on attributable costs where the Financial Acquisitions Threshold (FAT) is exceeded and if so, to also consider whether any Reduced Input Tax Credits (RITCs) are available.

A common error we have identified when reviewing financial supplies relates to the failure to undertake the FAT test monthly. There is a risk that taxpayers are recovering input tax credits to which they are not entitled. In addition, we have observed taxpayers seeking to recover RITCs on all related costs without fully considering whether those costs are eligible for a RITC.

Another key area is in relation to the application of the reverse charge provisions to cross-border transactions. These provisions are relevant to a range of entities, including:

• banks
• financial technology entities
• life insurers
• superannuation funds
• other funds.

We have published guidance, Application of the reverse charge provisions - findings of reviews, which draws on our observations to provide examples of what errors we have seen, as well as examples of best practice. The guidance provides our expectations and a set of recommendations that can help financial suppliers to reduce their GST compliance risk in this area.

GST classification

We are seeing classification of products by suppliers/wholesalers and retailers that are not consistent with the ATO view. We have seen misclassification of products extending beyond food, for example health products.

Errors are generally attributable to gaps in governance controls, such as:

• gaps in governance controls around onboarding of new products
• taxpayers not undertaking regular reviews of their product master data
• taxpayers’ reliance on a supplier’s classification without undertaking due diligence to determine the correct GST classification of the products being supplied.

Property

The property risk concerns the failure by taxpayers to correctly report the supply (including sale, transfer or leasing) of real property, as well as the incorrect claiming of input tax credits on the acquisition of real property or acquisitions related to the supply of real property. The risk addresses the construction/development of real property but excludes the behaviour of those who work in the industry, such as sub-contractors.

Some of the key risk areas for real property include:

• eligibility and application of the margin scheme where taxpayers have chosen to use this methodology
• misclassification of short-term supply of accommodation as a supply of residential premises or a supply of commercial residential premises
• incorrectly claiming of GST credits due to misclassification of supplies in relation to residential accommodation or commercial residential premises
• other issues, including
  • supplies of a going concern
  • unreported sales of real property
  • agency issues in relation to who is making the supply
  • failure to consider adjustments due to adjustment events.
   

Recipient created tax invoices (RCTI)

In the assurance reviews we have seen some of the following issues when reviewing RCTI:

• valid RCTI agreements are not in place (separate or embedded in the RCTI)
• suppliers are not registered for GST or no longer registered and have been issued with RCTIs

We expect taxpayers to regularly review transactions where the taxpayer either issues or receives an RCTI to ensure RCTI agreements are in place, whether separately or embedded in the RCTI. RCTIs will only be valid if the supplier is GST-registered at the time of issue. When RCTIs are issued to a supplier on an ongoing basis, we would expect taxpayers to undertake periodic checks to ensure the supplier remains GST-registered.

Taxpayers are advised that Legislative Instrument LI 2023/20, A New Tax System (Goods and Services Tax): Recipient Created Tax Invoice Determination 2023, issued on 15 June 2023, outlines the latest requirements for issuing RCTIs. This Determination replaces previously issued RCTI Determinations including those relating to large business entities. A key change is that the supplier and recipient must be registered for GST at the time of issuing an RCTI.

Data and transaction testing

We will undertake data and transaction testing for taxpayers that predominantly make input taxed supplies, such as financial services (including life insurance) industry taxpayers, in combined assurance reviews. For these entities, we do not undertake the GST Analytical Tool (GAT) in our combined assurance reviews but use data and transaction testing to assess correct reporting.

Data testing involves running numerous pre-determined tests against a defined data set to identify reporting errors and exceptions for further investigation or correction. Transaction testing involves tracing an identified transaction from its source documentation through to the financial reports to confirm the accuracy of the GST treatment, calculation and reporting of the transaction. Where errors and exceptions are identified, further investigation will be necessary or correction may be required.

For financial services entities and insurers, we have published bespoke tests that can be used to obtain greater confidence in correct reporting, at GST data tests for the financial services and insurance industry.

Alignment of tax and accounting outcomes

We analyse the differences between the BAS outcomes and accounting outcomes and seek to understand and explain the various streams of economic activity and how they are treated for GST by applying the GST Analytical Tool (GAT). This provides an objective basis to obtain greater assurance.

Ratings

We apply a consistent rating system when reviewing and assessing the alignment of tax and accounting outcomes, which is outlined below.

Ratings

Colour indicator	Rating	Category description
	High	We understand and can explain why the various streams of economic activity and the accounting and income tax results, and accounting and GST results, vary.
	Medium	Further analysis and explanation is required to understand the various streams of economic activity and/or why the accounting and income tax, and accounting and GST results vary.
	Low	We identified concerns from our analysis of the various streams of economic activity and/or why accounting and income tax, and accounting and GST results vary.
	Red Flag	We do not understand and cannot explain the various streams of economic activity and/or why accounting and income tax, and accounting and GST results vary.

The ratings for the alignment between tax and accounting area arising in the GST assurance reviews completed are shown below.

Graph 14: GST alignment between accounting and tax assurance ratings for the most recent assurance review completed, as of 30 June 2023

The GAT is a compulsory element of a combined assurance review to provide assurance that the right amount of GST has been paid. A taxpayer cannot achieve an overall high assurance for GST unless they attain a high assurance for this criteria. We apply the GAT in all combined assurance reviews except those where the taxpayer is predominantly an input taxed business.

The GAT provides us with an understanding of a taxpayer’s GST profile, assists us to identify key drivers of GST performance, and allows us to target areas of greater or lesser focus. The results for the GAT increase our confidence that routine and non-routine transactions are captured within the broader assurance review and that the BAS outcomes are consistent with the financial statement disclosures

The GAT uses a standard method statement applying a 'top-down' approach to identify and understand variances between accounting figures reported in audited financial statements and GST reported on the BAS.

The method statement starts with the revenue and expenses reported in the profit and loss statement. It works through a series of adjustments to compare this information with annualised BAS covering the financial reporting year. We do not expect taxpayers to reconcile the audited financial statements to the annualised BAS figures dollar for dollar but to be able to explain and provide evidence to support any variances.

There is an expectation as part of good GST governance that a taxpayer has a documented process in place to explain:

• BAS reporting of GST payable and receivable compared to business outcomes
• variances in comparison to financial statements.

We have observed the following in relation to the GAT:

• The majority of taxpayers (67%) achieved a high assurance for the GAT (see Graph 14).
• Taxpayers achieving a high assurance for GAT usually achieve an overall high assurance for GST
• Taxpayers are able to substantially complete the revenue side of the GAT on their own accord.
• We are receiving near complete GAT templates from the majority of taxpayers.
• When we meet with a taxpayer in relation to the GAT workings, we are finding the sessions to be very beneficial to both parties.
• We are providing assistance to taxpayers on the more complex areas such as
  • expense variances
  • timing differences
  • identifying GST group reporter amounts within tax consolidated group (TCG) financial statements
  • identifying intra-group transactions
  • financials reported in different currencies (multiple currencies in trial balance or profit and loss reports)
  • capitalised expenses flowing to the profit and loss report
  • the provision of objective evidence to support variances.
   

The application of the GAT is considered best practice process for organisations as a basis to reconcile the amounts reported in the BAS to the audited financial statements.

We have published guidance to support taxpayers when considering the application of the GAT:

• GST Analytical Tool (GAT) FAQ
• Top 1,000 GAT example .

GST next actions

At the conclusion of a combined assurance review, if we have identified areas of concern, we will either provide recommendations for the taxpayer to undertake or we may consider intervention through a formalised ATO next actions product.

Where a specific error or risk has been identified, we expect taxpayers to work with us to provide evidence to support their position or to demonstrate any steps they have taken to address our concerns.

Where we make recommendations for the taxpayer to action (referred to as a client next action), we will outline an expected timeline by which we expect taxpayers to provide further information of how they addressed our concerns, and we will follow up and check the steps taken to address our recommendations the next time we engage with the taxpayer. This could be through the next assurance review or a specific enquiry.

Where a particular GST risk is rated lower than ‘high assurance’ in an assurance review, in the vast majority of cases we will recommend that the taxpayer take further steps to address any concerns identified. Where a taxpayer addresses these concerns and identifies that GST has not been reported correctly, we encourage them to make a voluntary disclosure, providing full details of the error and the steps taken to ensure compliance going forward.

Where we identify a concern that we consider requires further ATO review, we will escalate this issue for a GST risk review or audit. Approximately 4% of taxpayers reviewed to date have been escalated for an ATO next actions review for GST.

Appendix 1 - Published guidance

To assist taxpayers in preparing for a combined assurance review, we provide the following published guidance:

• Top 1,000 combined assurance program
• Tax risk management and governance guides
  • Tax risk management and governance review guide
  • Tax risk management and governance
  • GST governance, data testing and transaction testing guide
  • Governance over third-party data (large super funds, managed funds and insurance companies)
   
• Outline of typical questions and areas of enquiry
  • Top 1,000 – what attracts our attention
  • Typical questions in a Top 1000 combined assurance review
   
• GST analytical tool – Top 1,000 GST assurance program.

Findings from the Top 1,000 income tax performance, combined assurance review and GST assurance review programs.