ATO flags GST errors by businesses

Next year, the GST will have been with us for 10 years. While it may not yet be Happy Birthday GST time, SMEs have now become used to the system, warts and all. The rapid development of computer software systems and programs has led to the automation of many of the processes surrounding GST compliance. But errors can be, and are still being, made.

The Tax Office has recently identified a series of common GST errors that have been made by businesses and explained how ineffective business systems and processes can cause GST reporting errors. Businesses may report incorrect amounts of GST if their systems for capturing and recording GST information fail.

According to the Tax Office, businesses going through change are most at risk of incorrectly reporting GST. Overall, common causes of errors with GST include:

• businesses experiencing rapid growth, restructure, mergers or de-mergers;
• installation of new accounting software;
• changes to accounting staff;
• failure of accounting systems;
• incorrect or incomplete BAS;
• incorrect interpretation of the GST legislation (hardly surprising given the complexity of the law);
• classification of taxable supplies as GST-free or non-taxable.

If one or more of the above scenarios fits your business, be careful that errors have not crept into your GST reporting and compliance.

GST errors cost money. In the 2007-08 year for instance, the Tax Office said it contacted over 1,800 large and SME taxpayers at risk of incorrectly reporting GST. The result was an extra $363 million in GST liabilities.

The Tax Office said, in 2007-08, in the SME market, the industries with the highest number of GST reporting adjustments were:

• retail trade, which accounted for 17% of adjustments;
• rental, hiring and real estate services, which accounted for 14% of adjustments;
• construction, which accounted for 13% of adjustments.

So how does the ATO identify businesses at risk of making errors? It uses information reported on tax returns and BASs, company published reports, information reported in the media and information on external databases such as ASIC.

The most common reasons for errors

Inadequate, non-existent or poorly documented controls can lead to a wide range of errors. But knowing what errors can be made can help SMEs be on the lookout for potential problem areas. Some of the major common errors include:

• Errors in BAS preparation (the ATO’s results showed that 51% of SMEs reviewed had this problem, by far the largest problem area), eg:

* transposing figures incorrectly when completing BASs;
* claiming GST credits without a valid tax invoice;
* excluding invoices produced outside the normal accounting system;
* transferring of GST information incorrectly between associated entities;
* GST control accounts not cleared;
* activity statement reconciliations not completed.

• Errors in incorrectly interpreting the GST law, eg:

* claiming GST credits in total tax invoice amounts when part of the transaction is not subject to GST;
* misclassifying supplies or acquisitions.

• Change of accounting staff: The Tax Office noted that a lack of understanding about internal processes led to errors in capturing and reporting GST information.
• Incorrect supply status: Incorrectly recording the transaction as GST-free or non-taxable has been a problem.
• Change of accounting software: Errors occurred when a new accounting system automatically overrode entries that had been recorded as non-allowable. Errors can also occurred when incorrect GST codes were allocated as GST-free on non-taxable items.
• Incorrect set-up of accounting systems or internal controls: This can lead to errors in processing one-off transactions (these transactions should be properly documented), incorrectly offsetting GST on taxable supplies against credits, and incorrectly processing rebates.

The above list is not exhaustive, but does illustrate areas that deserve attention.

So, what are the lessons from this? SMEs should at least consider reviewing their business systems and ensuring controls are adequately documented and that employees know and understand those controls. As human beings, we are prone to make mistakes from time to time. However, where a mistake or error is discovered, making a voluntary disclosure to the ATO might be considered. Doing this before an ATO audit is conducted can reduce the penalties that might otherwise apply.