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Role of GST audits


Some of our clients are confused with regards to GST audits. And here we have collected some information from Wolters Kluwer to illustrate this important role.

The system of self-assessment that applies to GST reflects the fact that the ATO cannot expect to be able to review every transaction or event. To do so would be too intrusive, time-consuming and costly for everyone involved.

Accordingly, under the self-assessment system, taxpayers are initially obliged to provide only limited information in their returns, without supplying supporting or verifying material. Apart from picking up some obvious errors, the ATO does not routinely check every return.

Clearly, such a system can only operate efficiently if there is a high level of voluntary compliance by taxpayers. This can be facilitated by:

  • educating taxpayers so that they are aware of their obligations and how to perform them; and

  • encouraging taxpayers to have ``faith'' in the system by establishing expectations of a level of fair treatment from the ATO

However, the ATO also carries out a series of compliance activities, which may range from simple to complex. These may take the form of:

  • telephone calls or letters to taxpayers asking for specific information;

  • unannounced visits;

  • "health of system'' checks;

  • specific checks;

  • BAS reviews;

  • income/sales reviews;

  • comprehensive audits designed to check that the correct amount of GST has been paid, that the correct procedures have been followed, and that the taxation laws have been complied with; and

  • procedures to deal with serious evasion or fraud, including prosecution.

In the event of an ATO enquiry, taxpayers must, if required, be able to produce detailed records that can support their claims. The making of false claims, the refusal to provide relevant information, the failure to keep records, and the failure to produce them when directed by the Commissioner may all give rise to penalties and, in serious cases, prosecution.

The approach that the ATO adopts in respect of a particular entity will depend in part on the nature and size of that entity. The ATO draws a distinction between the non-profit and government sector on one hand and the business community on the other. It divides the business community into three groups based on the size of turnover. Generally speaking, the larger the entity, the more comprehensive the ATO's audit and review activities will be.

During the transitional period for bedding down the GST the ATO's emphasis was on education. Since then the emphasis has shifted to enforcement. In addition, the previous ``empathetic'' approach to imposing penalties has been tightened. Businesses and their advisers can therefore expect to see a higher, and tougher, level of ATO compliance activity.

In addition, the general GST and income tax regimes have many similarities. As both are self-assessment regimes the audit function plays an important compliance role in relation to both. In light of those similarities, income tax audit experience is very valuable in analysing GST audits. The approach of the ATO to GST audits is broadly similar to its approach to income tax audits.

Over the years, the ATO has produced a number of documents setting out its audit policies, and its use and exercise of its access and information gathering powers. The principles behind these documents are equally applicable to GST. Some have been specifically updated on account of GST and some have not. Where they have not, the broad policy principles are still relevant and provide useful guidance as to the ATO's attitude to GST audit activities. The best example of this is the Taxpayers' Charter, which has been updated for GST.

Conceptually, income tax and GST are two very different taxes. Income tax is a tax on income, GST is a tax on supplies. This difference means that, at a practical level, different methods are required by the ATO to ensure compliance with these different taxes. Because GST is a transaction-based tax, audit activities necessarily focus on individual transactions and the systems that a taxpayer has to monitor and record those transactions. It also means that assessing GST compliance is more of a ``real time'' exercise than income tax compliance.

Given the transactional nature of GST, GST compliance activities are more likely than income tax compliance activities to have the following characteristics:

  • shorter but more frequent audits;

  • audits covering specific transactional issues;

  • audits covering selected monthly or quarterly tax periods rather than 12-month income years;

  • increased "hands on'' audit activity at the taxpayer's premises;

  • andincreased use of computer-assisted techniques.

GST audits is playing an increasingly significant role in corporate auditing. And if you have any enquiry, please feel free to contact us at Wis Partners Group.

(Information source: Wolters Kluwer)