We seek assurance that financial suppliers are correctly reporting their GST payable and GST credits claimed.
When you keep good records we can have more confidence that you are reporting correctly.
We have set clear expectations about the records financial suppliers need to keep in relation to priority issues we have identified under our GST Financial Services and Insurance strategy.
For more detailed information on what is required, see:
- Top 100 GST assurance program
- Top 1,000 combined assurance program
- Top 1,000 GST assurance program
- GST Governance, Data Testing and Transaction Testing Guide
- Seven principles of effective tax governance – for small and medium businesses.
The priority issues we are focusing on include:
- determining the extent of creditable purpose
- reduced credit acquisitions
- the reverse charge for recipients of cross-border supplies
- classification of supplies
- significant or unusual transactions.
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.
Where acquisitions are made by a business area of the enterprise that makes both input taxed and taxable or GST-free supplies, you must ensure that the method gives a fair and reasonable reflection of the extent of the relationships between the relevant acquisitions and the different types of supplies. For example, you will need to have regard to whether some of the acquisitions only relate to making financial supplies. Conversely, you will need to have regard to whether some of the acquisitions only relate to making taxable or GST-free supplies.
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 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 supplies and acquisitions flow through your system; an explanation of how GST credits and GST payable are captured, processed and calculated each period).
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 – for example, if a method uses an input where updated data is readily available on an annual basis, such as transaction count or revenue data, we would expect the input used in the method to be updated annually
- 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)
- that you meet the requirements to apply Practical Compliance Guideline (PCG) 2017/15: GST and customer owned banking institutions, if you rely on this PCG to apply the 18% rate as your extent of creditable purpose – this PCG is intended to remove complexity and to minimise compliance costs for customer-owned banking institutions in meeting their GST obligations
- how you have taken into account the Commissioner's public guidance on apportionment of costs to provide credit cards, transactions accounts and home loans – where applicable, we may ask you to tell us in writing whether you have reviewed your risk rating under PCG 2019/8: ATO compliance approach to GST apportionment of acquisitions that relate to certain financial supplies and which risk zone your arrangements fall within.
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 that is not fair and reasonable, when direct methods are available to you (for example, where you treat acquisitions as being overheads and apply an enterprise rate, when instead you could have used information you hold to recognise in your apportionment method that acquisitions directly relate to specific supplies).
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.
For more detailed information, see:
- GSTR 2006/3 Goods and services tax: determining the extent of creditable purpose for providers of financial supplies, in particular, paragraphs 145 to 150
- GSTR 2019/2 Goods and services tax: determining the creditable purpose of acquisitions in a credit card issuing business
- GSTR 2020/1 Goods and services tax: determining the creditable purpose of acquisitions in relation to transaction accounts
- GSTR 2004/4 Goods and services tax: assignment of payment streams including under a typical securitisation arrangement.
- GSTR 2008/1 Goods and services tax: when do you acquire anything or import goods solely or partly for a creditable purpose?
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).
For more information on reduced credit acquisitions, see GSTR 2004/1 Goods and services tax: reduced credit acquisitions.
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. The price of the related-party cross-border charges must be the same as the price used for income tax transfer pricing purposes.
Further information is available on GST and cross-border transactions between businesses.
For best practice recommendations on the application of reverse charge rules and linkage to tax governance, see Application of the reverse charge provisions.
We are seeking assurance that you are correctly applying the GST law to classify your supplies.
For instance, in relation to the use of rights offshore, we will seek 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.
For example, 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.
For more detailed information on the classification of supplies, see:
- GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions
- 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)
- GSTD 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)?
- GSTD 2020/1 Goods and services tax: when is the supply of a transaction account GST-free under table item 3 or table item 4(a) of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?
We expect you to manage the tax risks involved in significant or unusual transactions, and we may ask you for evidence of:
- the types of issues where you seek advice from internal or external experts or engaging with the ATO if a transaction is
- highly technical
- unusual for your business
- your procedures for staff to identify unusual or significant transactions, which must be escalated to the tax function and ensure these transactions are treated correctly for GST purposes
- your reporting processes for monitoring, reviewing and reporting to senior management and the board on tax risks regarding 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.
For more detailed information, see:
- GST Governance, Data Testing and Transaction Testing Guide
- Mergers and acquisitions – claiming input tax credits
- GST and floating a company.