6 June 2022
In Brief
The ATO has recently begun issuing early notification letters for its next round of Combined Assurance Reviews (CAR) under its Justified Trust Program. Referred to as "CAR 2.0", from a GST perspective many of the questions remain the same but with some key differences, including:
- The ATO now expects taxpayers to complete the GST Analytical Tool (which was optional in the previous round of CARs). This requires a reconciliation between the annualised BAS figures and financial statements.
- The ATO wants an assessment of the design effectiveness of key controls as compared to the ATO's published guidance by asking for a copy of any gap analysis conducted, or if this has not been undertaken, evidence of any self-assessment of the key controls operating effectively (e.g. via data testing). This appears to signal an expectation by the ATO that taxpayers are proactively seeking to review and improve their Justified Trust.
- While the questions relating to Tax Risk Management and Governance are broadly similar, there is a greater emphasis on providing documentary evidence of the Managerial level controls (MLCs) and Board level controls (BLCs), especially those considered fundamental to the correct calculation and reporting of GST. There also continues to be a significant overlap of questions which relate to controls that are common to both income tax and GST.
- There is a requirement to provide a sample month of transactional data to support the GST reported and input tax credits claimed in the BAS for that month.
In addition to the above, we have also noted that more industry focussed questions are now being raised by the ATO as part of some CAR 2.0 RFIs, with particular questions directed at known or perceived GST risks relevant to specific industries.
With only 8 weeks within which to respond to both the income tax and GST questions raised in CAR 2.0, taxpayers should prepare ahead of time so that they are not caught on the hop but rather are in a position to put their best foot forward and in so doing, optimise their assurance rating from the ATO.
In Detail
The Top 1,000 Combined Assurance Program covers large public and multinational companies with income tax and GST turnover above $250 million.
In 2021, many taxpayers in the Top 1,000 were notified of a CAR which has an income tax and GST component. CAR 2.0 is intended for taxpayers who have not previously been subject to a CAR. However, it is possible that taxpayers that have previously undergone a GST Streamlined Assurance Review (SAR) may also be asked to undertake a "Top up CAR" in line with CAR 2.0.
The GST RFIs for CAR 2.0 are similar to what has been issued in the past, covering Tax Risk Management and Governance, Tax Risks Flagged to Market and Specific GST risks. The key differences to previous RFIs are detailed below.
GST Analytical Tool
Unlike previous RFIs, the GST Analytical Tool or GAT must be completed by taxpayers. This requires a reconciliation of annualised BAS figures to financial statements and aims to determine why accounting and GST figures may vary. It is not intended to be used by taxpayers that make predominantly input taxed supplies. The GAT for general insurers is also currently being developed by the ATO.
Design effectiveness of key controls
As part of its questions on Tax Risk Management and Governance, the ATO asks whether a gap analysis has been undertaken to compare the design effectiveness of current policies and procedures against the ATO's published guidance. If a gap analysis has not been performed, the ATO wants to know if a self-assessment has been applied to test and obtain evidence of the controls operating effectively.
Notably, assessing the design effectiveness and operating effectiveness of controls is undertaken by the ATO as part of a GST SAR through walkthroughs and data testing. Therefore, taxpayers who are able to provide evidence of a gap analysis and/or data testing (as well as any work undertaken to remedy gaps) are likely to be viewed more favourably. This should mitigate the risk of the CAR progressing to a GST SAR.
Tax risk management and governance
The GST RFIs relating to tax risk management and governance are broadly similar. The key difference, however, is that the ATO is now requesting more documentary evidence of the existence of the MLCs and BLCs, rather than simply a description of how these operate. As many controls are common to income tax and GST, it is important to ensure that responses to these are coordinated and aligned. Of interest is the fact that the ATO has included the specific tax governance queries in both the GST and income tax RFIs (previously included as an RFI Appendix, much higher level) - this emphasises the increasing importance the ATO places on an entity's tax governance.
Sample transaction data
As part of the questions raised for specific GST risks, the ATO now requests an electronic copy of one month's work papers and reports extracted from the system in order to prepare the BAS, including the GST GL transactional data used to support the amount reported at labels 1A and 1B of the BAS. We expect that this is being requested to give the ATO scope to interrogate a taxpayer's data through some level of data testing.
Other observations
In addition to the above key differences in CAR 2.0, there are also some other differences to be aware of, including:
- Tax Risks Flagged to Market
- Reference is made to an additional Practical Compliance Guide, PCG 2018/6 - GST - Inbound Tour Operators and Agency.
- Specific GST Risks
- As noted above, the ATO has begun asking industry specific questions. This appears to be the case for taxpayers in the Property, Financial Services, Insurance and Superannuation, and Food industries;
- There are questions that are specifically directed at identifying any non-resident related entities that are registered for GST but not part of the taxpayer's GST group;
- There is a new question relating to whether there are any inbound intangible consumer supplies or supplies of low value goods;
- In relation to Systems, additional questions are raised relating to how files are protected and segregated, as well as the location and detail of any overseas accounting / processing systems;
- The question on Property now makes reference to specific categories of supply;
- Questions regarding the Financial Acquisitions Threshold (FAT) now specifically request for copies of any advice obtained, policy and procedures documents and workpapers to support the calculations and any application of the reverse charge, including the provisions relied upon for claiming any reduced input tax credits;
- There is an additional question for Recipient Created Tax Invoices (RCTIs), which asks how you monitor the GST registration status of suppliers to whom you issue RCTIs;
- With respect to joint venture arrangements, further detail is being requested including a copy of the JV agreement and GST registration details of the joint venture operator that is lodging BASs;
- Some of the questions excluded from CAR 2.0 include questions regarding the following (although some of these may be raised separately as part of the industry specific questions):
- Division 83 reverse charge;
- Apportionment methodologies - Banking & Finance;
- General insurance;
- Food;
- Tracking and identifying transactions between GST group and non-GST group members.
The Takeaway
It is clear that as the ATO gathers more information and experience from the assurance reviews it has already undertaken, that it will continue to update and refine its RFIs. It is also clear that as some time has already passed since the ATO commenced its Top 1,000 CAR program, its expectations in terms of what taxpayers have been doing to prepare for a Justified Trust review has increased. In this regard, those taxpayers who have prepared beforehand are more likely to be on the front foot with the ATO and better able to optimise their level of assurance. This in turn should minimise the level of ongoing review required by the ATO and therefore reduce the time, cost and disruption caused to its business.
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Contact us
Brady Dever
Partner, Tax Reporting and innovation - Financial Advisory Alliances, PwC Australia
Tel: +61 431 759 399