Australian Taxation Office GST Audits – is your business ready?

The Australian Taxation Office (ATO) has an active compliance program to raise GST revenues. This entails the ATO making compliance checks and undertaking audits in areas that they consider are risk areas. It is important businesses stay abreast of GST requirements and perhaps undergo a GST “reverse audit” from time to time to ensure they are meeting their obligations and prevent any nasty surprises.

Underpinning this increased targeting is concern from the ATO that there is a lack of GST compliance and understanding and that after more than seven years since introduction, more and more mistakes are being made.

The ATO has given indications of the areas that they wish to target. These include:

• Cash businesses,
• Over claimed credits,
• Record keeping issues,
• Compliance, and
• Complex areas.

Furthermore, the ATO is targeting not for profits (NFP) for the first time as there is a belief that there is a lack of understanding of GST in the NFP sector.

So what sort of things should you be keeping an eye on?

Credits

The ATO is particularly keen to review what credits have been claimed by businesses. It is looking to see if the credit relates to a creditable purpose, or whether the business has claimed a GST credit that it is not entitled to.

The ATO will be seeking to identify claims for credits that relate to input taxed activities, such as residential lettings, the issue of shares and other financial supplies. Where an input taxed supply is made, credits are not usually claimable. Businesses that are otherwise fully taxable and able to claim credits for their business often fail to realise that such credits cannot be claimed.

Also targeted are claims for credits where there is a private element and claims for non-deductible expenditure such as entertainment, relative’s travel expenditure or recreational club expenses. It should be noted that GST on an expense might not be creditable even though the business may regard it as essential to the business.

Businesses may have difficulty in distinguishing what expenditure is for the carrying on of the business and that which is not, particularly where expenditure is incurred partly for the business, and partly for non-business purposes (such as for a hobby or for other purposes). It is essential that where there is mixed use that records are kept to ensure that an apportionment can be shown if the credit is queried by the ATO. In addition, any necessary adjustments need to be carried out if creditable use alters.

The ATO will also look at an activity to determine if it regards there is an enterprise being carried on, particularly where the activity may be regarded as having a personal benefit, for example where yachts, horses or cars are involved.

Records

Poor record keeping is also on the ATO’s radar and may lead to assessments for incorrectly claimed input tax credits or underpaid tax on income received. For example, unless there is a tax invoice to support the claim for the input tax credit, the credit cannot be claimed. Too often the taxpayer may have received a tax invoice but is unable to locate it or may have misfiled it. In such circumstances the credit cannot be reclaimed unless a duplicate is obtained from the supplier.

Businesses sometimes fail to account for GST on ‘sundry’ income. Frequently, the main businesses supplies are correctly accounted for, but one-off or unusual transactions fail to get accounted for correctly. This would include part-exchange transactions, goods taken for own use, sales of scrap etc. In addition, many businesses fail to keep proof of export, and this will result in the ATO denying the GST-free status of the supply. GST will be due on the supply, even though the customer may not have paid any GST.

Cash businesses

Cash businesses such as the hotel trade, hospitality businesses, tourism and the restaurant trade are also being actively targeted. Assessments may be raised where there is a suspicion that all takings have not been declared, or where the takings or ratios of the business are at variance from other similar businesses. Again, good records can assist in preventing assessments being raised or in disputing the assessments. Records are the necessary proof to substantiate a business’s activities; without them it is extremely difficult to obtain a favourable settlement.

Compliance

Where a business is late in submitting its Business Activity Statement, or late in paying tax due, it is more likely to attract the attention of the ATO. Good cash flow planning and workflow management can assist in ensuring that deadlines are met and obligations fulfilled. This reduces the risk of receiving an ATO audit and also the possibility of receiving an assessment, penalty or interest charge.

Complex areas

There are numerous complex areas where GST can become a significant issue. The ATO concentrates its audit activity in these areas as it knows that it can raise tax revenue and penalties; mistakes are commonplace, particularly where the complex activity is not a part of the core business. Areas that can be considered complex include;

• International services
• Exports of goods
• Financial services
• Deposits
• Property transactions
• Group transactions and restructuring; and
• Supplies of a going concern.

Not for Profits

The ATO is particularly targeting the NFP sector as it has found that there are numerous mistakes being made. Often NFPs believe activities can be treated as GST-free when there is no GST-free relief available. Some transactions can be treated as GST-free, input taxed or taxable, which inevitably leads to confusion. Furthermore, the NFP sector often does not have the resources to deal with the GST issues.

What you can do - Reverse audits

Grant Thornton offers a ‘reverse audit’ service to assist businesses in preparing for an ATO audit or even preventing one arising. This examines the systems of the business to identify potential weaknesses or problem areas that may concern the ATO. Recommendations can be made for record keeping and systems improvement. These can then be rectified prior to any ATO audit or attention.

The reverse audit may even highlight opportunities to reduce GST costs or improve cash flow. Experience has been gained over the past 25 years, in Australia and overseas, in dealing with the tax office audits and how to prevent them.

Author: John Davison, March 2008

John is an indirect tax specialist. John is based in the Grant Thornton Sydney office, but services clients nationally.

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