Integrity of Business Systems (IBS) risk - essentially the chance of accounting systems and processes going awry during the course of GST compliance - has long been identified by the Australian Tax Office (ATO) as the major risk to Australia’s GST revenues. The latest round of updates from the ATO, announced in its roadshow for the 2014/15 GST Annual Compliance Programme, further cements IBS risk at the top of its agenda.
For the last few years, the ATO has largely taken a ‘stick’ approach to the problem of IBS risk, conducting numerous systems and process based reviews and audits in order to detect GST errors caused not by a lack of understanding of taxation legislation by a tax function, but by a failure of process usually within the wider business. Often, these reviews can be time consuming and costly to the taxpayer.
Now, in a remarkable and very welcome move, the ATO is offering the ‘carrot’ with its stick, and offering real incentives for businesses to take IBS risk seriously.
Moratorium on GST IBS reviews
In a move designed to recognise willing participation in the taxation system and reward businesses who make the necessary investment in their GST process and systems integrity, the ATO is offering a moratorium on GST IBS reviews for taxpayers who adopt a self- review policy, and in particular, use self-assurance software as part of their regular GST compliance. Not only that, but the ability to avoid interest and penalties on GST errors discovered and disclosed using self-assurance software, and even the opportunity to extend or remove the ‘correcting GST mistakes’ limits altogether, is also on the horizon.
The concept of self-assurance is not new in Australia, but it is a relatively new step for the ATO to give it pride of place in its approach to the regulation of tax legislation.
Specifically, the ATO has stated that “self-assurance requires ongoing commitment by business(es) to use assurance tools to validate their transactional systems, review the output of risk tests, rectify procedural weaknesses and address any issues that may affect the correct reporting of their GST obligations and entitlements”.
In a nutshell, a taxpayer would be expected to have automated processes for preparing the BAS each period, with minimum human interaction required. That could spell an end to days of complicated and time consuming reports being run and manually transposed into spreadsheets.
Automation brings requirements to self-review and regulate in a similar manner to the ATO as if it was performing an IBS review. This means performing trending and variance analysis every period, having divorce of responsibility between preparer and reviewer, having a clear mechanism for making manual adjustments and checklist sign off each period. Probably most important, and useful for business, is to perform regular exception tests on data in order to isolate transactions which may have received an incorrect GST treatment as they pass through the accounting system.
What are the next steps?
The cost of an ATO systems and process review can vary dramatically depending on the depth and length of time taken. For a business classed as ‘large’ by the ATO, in our experience, it would be unusual for the cost of even a relatively light touch review be to much less than $40,000 (made up of staff cost and adviser cost) and often much more – and that is before any interest and penalties may be applied. With large businesses expecting an ATO review about once every 4 years, there is a strong business case for taking advantage of the ATO’s offer, even before the benefits up to date systems and processes provide, including time saved, interest and penalties avoided and additional GST credits identified.
Although the ATO has yet to provide a detailed framework for the plan, taxpayers are encouraged to assess their current position with regard to systems, processes and understanding of their transactional data to form a view on what they may need to do in order to fulfil the ATO’s requirements for a self- assurance model. In some cases, it may be that existing processes can be tailored and updated to meet the required standard, in other cases the use of third party compliance software, such as PwC’s Comply First Time can be a quick and cost effective solution.
One means of defraying the cost of self-assurance software (if not covering it entirely) can be the use of GST accrual accounting – whereby input tax credits available on invoices that are posted late (usually taken into account in a subsequent period) are correctly taken into account in the period in which the invoice was issued.
GST accrual accounting undertaken on an actual basis (i.e. on invoices actually posted to the system after the period has closed but before a BAS is submitted) has long been a valid approach, but lends itself to automated software to remove any risk of over claims or failing to reverse the calculation each period.
The alternative estimated method, based on actuarial calculations to derive a value, has traditionally been frowned upon by the ATO, however that position may be softening and a long awaited declaration of the ATO’s position is expected imminently. Expect the approach to once again favour, if not outright require, an automated monthly software approach over ‘set and forget’.
However taxpayers choose to respond to this new approach, there has been a clear shift in the way the ATO is choosing to engage with businesses. Those taxpayers taking a proactive approach to self-assurance will surely be the ones who stand to gain the most long-term benefits.