Top 1,000 GST assurance

GST assurance

The Top 1,000 population is the largest contributor to GST and makes up about 38% of the total net GST collections. We have completed 735 reviews for GST through two Top 1,000 programs. This is made up of:

• 193 assurance reviews through the GST streamlined assurance program (program ended 30 June 2023)
• 340 combined assurance reviews where we conducted a risk review approach and didn't provide an assurance rating
• 202 combined assurance reviews where we provided an assurance rating, including 59 where the taxpayer was reviewed for a second time.

As with income tax, a stage 2 rating for GST governance and control framework is required to achieve an overall high assurance rating. This reinforces the strong correlation between poor governance and inadvertent or system errors that result in GST reporting mistakes and GST lodgment revisions.

Whilst the majority of taxpayers have been rated as being a stage 1 rating for GST governance as at their last review, we have observed an increase in the number of taxpayers achieving stage 2 and stage 3 ratings. This has led to increases in overall high assurance for GST in recently completed reviews, which we expect to continue to see as we further review the population.

Ratings

The overall level of assurance is based on an assessment, having regard to objective evidence, as to whether the taxpayer is considered to have paid the right amount of GST.

We apply consistent rating categories when considering our overall level of assurance.

Ratings categories for overall levels of assurance on GST

Colour indicator	Rating	Category description
	High	We obtained assurance that the taxpayer paid the right amount of GST for the scope and period of this review.
	Medium	We obtained assurance in relation to some but not all areas within the scope reviewed. For those areas not yet assured, further evidence and/or analysis will be required before we obtain assurance that the taxpayer paid the right amount of GST.
	Low	We have specific concerns around the taxpayer’s compliance with the GST laws and the amount of GST paid relevant to the period and scope of this review.

Obtaining overall high assurance rating

In the Top 1,000 program, we apply a principled approach to reaching overall high assurance (justified trust). This is based on 2 elements:

1. A quantitative threshold of more than 90% tax assured and economic activity correctly reported, and

2. An objective assessment of 5 qualifying factors.

The 5 qualifying factors

1. Tax risk management and governance

Tax risk management and governance is rated at least a stage 2.

2. Tax risks flagged to market

Any material or significant tax risks flagged to market (Practical compliance guidelines (PCGs), taxpayer alerts) reviewed in the combined assurance review must each receive at least a medium level of assurance and not require any further ATO next actions based on the information provided.

3. New, significant transactions and specific tax risks

Any material new or significant transaction reviewed in the combined assurance review must each received at least a medium level of assurance and not require any further ATO next actions based on the information provided.

4a. Alignment between accounting and tax results - GST Analytical Tool (GAT)

The GAT calculation and any underlying assumptions or proxies have been verified with objective evidence provided by the taxpayer. The GAT calculation has not highlighted any new areas of concern and is rated as high assurance.

4b. Correct Reporting (predominantly input taxed suppliers only)

The results of the e-audit / third party data testing and transaction testing have been verified with objective evidence provided by the taxpayer. The data and transaction testing has not highlighted any new areas of concern and is rated as high assurance.

5. Cooperative and collaborative behaviour

The taxpayer has been engaged and collaborative throughout the process and in working with the taxpayer we have not observed any non-cooperative behaviour.

Overall levels of assurance

This year we have seen an increase in the number of taxpayers where we have assurance that they have paid the right amount of GST, with 37% of taxpayers assured now at overall high assurance at their last review. The majority of taxpayers (59%) have a medium overall assurance rating, and 4% have a low assurance rating (see graph 11).

This increase is a result of 44% of reviews in 2024 achieving an overall high assurance rating. The number of taxpayers achieving a low assurance rating in this year was consistent with the overall population (5%), and 51% of taxpayers reviewed in the year obtained a medium assurance rating.

We have now reviewed 59 taxpayers for GST for a second time. Due to this small number, we haven't included comparison graphs in this report, but note that we observed an increase in overall high assurance ratings, with 53% of these taxpayers achieving an overall high assurance rating compared to 22% achieving an overall high assurance rating on their first review. We anticipate that we will be able to publish a comparison in the 2024/2025 findings report.

5% of all taxpayers reviewed in 2024 obtained an overall low assurance rating, which remains relatively constant from previous years. For these taxpayers that were rated as overall low assurance in 2024 reviews, all had a governance framework not designed effectively, and as a result the rating was a stage 1 or a red flag. In most of these cases, the GAT was also a low assurance or red flag.

Graph 11: Overall assurance ratings for all GST assurance reviews in their most recent review, as of 30 June 2024

Overall assurance rating for reviews completed by industry

Graph 12 shows overall assurance ratings for the entire population. We continue to see lower levels of high assurance in the wholesale, retail and services industry.

Graph 12: Overall GST assurance ratings by industry split for all GST assurance reviews as at their most recent review, as of 30 June 2024

Note that the graph shows the overall assurance ratings by the number of taxpayers for the following key industry groupings:

• manufacturing, construction and agriculture (MCA)
• financial services (FS) (banking, finance and investment, superfunds, and insurance)
• wholesale, retail and services (WRS)
• mining, energy and water (MIN).

Tax risk management and governance

Tax risk management and governance is a key focus area. As a transactional tax that is data driven, it is important that there is a strong, board-endorsed tax governance framework and that it is 'lived' in practice.

We consider the existence, design and operation of a tax control framework for GST focusing on the 8 controls set out in the GST Governance, Data Testing and Transaction Testing Guide (GST Guide)

The GST Guide provides guidance to help taxpayers conduct a self-review of their tax control frameworks for GST purposes. Our reviews focus on the following controls aligned with the justified trust objectives:

1. Board-level control 1 (BLC 1)-Formalised tax control framework
2. Board-level control 3 (BLC 3)- The board is appropriately informed
3. Board-level control 4 (BLC 4)- Periodic internal control testing
4. Managerial-level control 1 (MLC 1)- Roles and responsibilities are clearly understood
5. Managerial-level control 3 (MLC 3)-Significant transactions are identified
6. Managerial-level control 4 (MLC 4)- Controls in place for data
7. Managerial-level control 6 (MLC 6)- Documented control frameworks
8. Managerial-level control 7 (MLC 7)- Procedures to explain significant differences.

For GST, our key focus is on BLC 4, MLC 4, MLC 6 and MLC 7 as they directly impact the correct reporting of GST.

Ratings

We apply a consistent rating system when reviewing and assessing tax governance. We consider the existence, design and operation of a tax control framework for GST. During the review, we refer to the initial areas of focus set out in the GST Guide before their review starts.

Ratings

Colour indicator	Stage	Category description
	Stage 3	The taxpayer provided evidence to demonstrate that a tax control framework exists, has been designed effectively and is operating effectively in practice.
	Stage 2	The taxpayer provided evidence to demonstrate that a tax control framework exists and has been designed effectively.
	Stage 1	The taxpayer provided evidence to demonstrate a tax control framework exists.
	Not evidenced or concerns	The taxpayer did not provide sufficient evidence to demonstrate a tax control framework exists or we have significant concerns with the taxpayer's tax risk management and governance.

The tax governance ratings for the GST assurance reviews for taxpayers reviewed up to the end of June 2024, as at their most recent review, are in graph 13.

Graph 13: GST governance assurance ratings for all GST assurance reviews based on the most recent review, as of 30 June 2024

In graph 13 most taxpayers (57%) achieved a stage 1 for GST tax governance, as at their last review.

In the last 12 months we have seen an increase in the number of taxpayers with effectively designed GST governance, with 45% of those reviewed in 2024 achieving a stage 2 rating. Further, 5% of taxpayers reviewed achieved a stage 3 rating for governance, having been able to provide evidence that their controls are operating effectively. This is a significant shift from prior years, and one we anticipate will continue.

We have observed a positive increase in taxpayer willingness to develop board approved GST testing plans and, in the absence of a plan, a board endorsed commitment to undertake controls testing within a 3–5 year rolling audit period. This increase in providing such commitments for BLC4 is the main driver contributing to the increase in stage 2 ratings for governance in GST.

A stage 1 rating for governance is the most significant reason preventing taxpayers from achieving overall high assurance for GST. Across all GST assurance reviews, 40% of taxpayers achieving an overall medium assurance rating would have achieved high had their governance been designed effectively. For reviews completed in 2024, 30% of taxpayers that achieve an overall medium assurance rating would have reached an overall high assurance rating had they achieved a stage 2 for governance, reinforcing that we are seeing improvements in GST governance.

Areas of focus

The way in which a taxpayer's systems create, capture, collate and report GST is fundamental to the correct reporting of their GST obligations. The ATO considers the GST governance and tax control framework supporting this is one of the most significant focus areas for a GST assurance review because incorrectly reported transactions can often lead to significant GST effects over time. For example, an error in the way a supply is coded for GST purposes can extrapolate to significant GST shortfalls when replicated through large volumes of sales.

The following information are the issues for taxpayers to focus on and improve to address their GST risk management and governance frameworks. These are specific observations from our recent reviews, and taxpayers should consider these in conjunction with the GST Governance, Data Testing and Transaction Testing Guide

In addition to these comments, we note that as more taxpayers are reaching a stage 2 rating for their income tax risk management and governance framework, and commence carrying out periodic internal control testing, we expect taxpayers will also commence testing their GST controls.

When assessing whether a taxpayer has GST controls that are operating effectively, we will first confirm that the controls are designed effectively, either by considering any changes to the controls since our earlier review, or where we haven't previously rated those controls at stage 2, by examining the objective evidence to support a stage 2 rating.

Taxpayers should ensure they have assessed their GST controls as meeting the requirements for design effectiveness by reference to the GST Governance, Data Testing and Transaction Testing Guide prior to commencing periodic internal control testing.

Common controls

Five controls are referred to as the 'common controls' (BLC1, BLC3, MLC1, MLC3 and MLC7) because the design elements are equally as critical for both income tax and GST, and there are common features in the way these controls are evidenced. In situations where these common controls are not at a stage 2 for GST, it is typically due to a control being designed for income tax, but that design doesn't extend to GST.

With MLC 7, taxpayers are generally able to describe their procedures for the monthly reconciliation of the BAS outcomes with the general ledger. We observed that most taxpayers regularly carry out a monthly reconciliation of the BAS outcomes with the general ledger, however there is generally no reconciliation between the BAS outcomes and the audited financial statements. A small number of taxpayers are now including this as a feature of their MLC7 control.

BLC 4: Periodic internal control testing

A taxpayer must evidence a commitment to undertake periodic internal control testing. This may be evidenced through a statement as part of the Board endorsed tax control framework, a Board endorsed testing plan, or a written confirmation from the Board, a Board sub-committee, executive leadership team or other senior representative or delegate of the Board.

Once the periodic internal control testing has been undertaken by an appropriately qualified independent tester, we need to be provided with documents that allow us to understand:

• the testing that has taken place, which outline the testing methodology, sample size selected, and types of source documents relied upon by the tester
• the final results of the testing
• the steps taken to address any of the concerns identified in the testing
• Board acknowledgement of the testing results and the actions taken to address those concerns.

We have observed a willingness for taxpayers to develop board approached GST testing plans, and in the absence of a board approved plan, to provide a board endorsed commitment to undertake controls testing within a 3 to 5 year rolling audit period. This increase in providing such commitments is the main driver contributing to the stage 2 ratings for governance in GST.

MLC 4: Controls in place for data

We have increasingly seen taxpayers with robust controls in place for data for supplies and acquisitions made in the normal course of business. Taxpayers need to focus on ensuring that there are appropriate fully documented procedures in place for processing accounts payable and accounts receivable and specifically addressing manual adjustments that are outside the usual ledgers, including unusual or 'one-off' transactions, manual adjustments to correct errors and routine end of month or year adjustments.

MLC 6: Documented control frameworks

Taxpayers are generally able to describe their BAS preparation process, including the data and trend analysis that is undertaken, and any exception reporting processes. However, to achieve a stage 2 rating, taxpayers need to focus on ensuring that the fundamental aspects are fully documented, including segregation of duties, ledger to lodged BAS reconciliation, and trend and exception reporting.

Significant and new transactions, specific tax risks and tax risks flagged to market

We review the GST treatment of the taxpayer’s business activities, particularly significant and new transactions. We also review risks or concerns communicated to the market to determine if they are present.

Ratings

We apply a consistent rating system when assessing the GST treatment of taxpayer’s business activities.

Ratings

Colour indicator	Rating	Category description
	High	We obtained a high level of assurance that the right GST outcomes were reported in the taxpayer's BAS for the scope and period of this review.
	Medium	More evidence or analysis is required to establish a reasonable basis to obtain a high level of assurance.
	Low	More evidence and analysis is required to determine whether a tax risk is present.
	Red flag	We have concerns there is non-compliance with the GST law.
_	Out of scope	We have not evaluated this item and not expressed a rating.

Observations

The following areas are key GST risk areas that result in corrections to returns reporting and lower assurance ratings. These may not apply to all taxpayers.

Supplies and acquisitions

A common GST risk is incorrect reporting of supplies and acquisitions from inadvertent errors. Often such errors are identified from a taxpayers’ self-review of its systems and reporting of GST and result in the taxpayer voluntary disclosing a GST shortfall for tax periods both within and outside the tax periods being reviewed. We observe these types of preventable errors when taxpayers make voluntary disclosures upon being notified of a review starting and throughout the progress of the combined assurance review, with this occurring in 40% of combined assurance reviews carried out in 2024.

Whilst the disclosures for these errors may not be material in dollar terms, it is important for business to have good governance and control frameworks in place that detect and remediate errors on a regular basis. The transactional nature of GST means that undetected errors can compound to material amounts unless identified and addressed. We have also received voluntary disclosures where errors have occurred in relation to one-off transactions that are not core business activities.

Specifically in relation to supplies we have observed the following:

• misclassification of supplies as GST-free (for example, exports, health and food products)
• incorrectly treating adjustment events associated with supplies made in previous periods (for example, the provision of volume rebates)
• accounting and BAS reporting errors
• errors in reporting GST on post tax employee contributions
• related party transactions including tripartite / multiparty transactions.

Although some errors were identified, importantly approximately 89% of taxpayers reviewed achieved high assurance for supplies, in reviews where GST was assured.

Specifically in relation to acquisitions we have observed the following:

• incorrectly treating an acquisition as creditable, such as non-deductible entertainment expenses
• incorrectly claiming input tax credits where suppliers have either no GST registration, no ABN, an invalid ABN, or a cancelled ABN
• tax coding and system setup errors
• incorrectly claiming input tax credits on amounts provided to employees as an allowance
• related party transactions including tripartite and multiparty transactions
• application of Division 78 on claiming a decreasing adjustment on settlement payments in the insurance section.

Although some errors were identified, importantly approximately 90% of taxpayers reviewed achieved high assurance for acquisitions.

Financial supplies

Financial supplies and acquisitions arise not only in the financial services sector but also when a taxpayer in any industry engages in mergers, demergers, company acquisitions, initial public offerings or other similar activities involving share transactions. Whilst we observe that taxpayers understand that these supplies are input taxed, some taxpayers are not carrying out Financial Acquisition Threshold (FAT) analysis to determine whether input tax credits can be recovered on associated costs including certain preparatory costs.

Additionally, the following issues continue to attract our attention, or have come to our attention in recent reviews:

• taxpayers seeking to recover Reduced Input Tax Credits (RITCs) on costs without fully considering whether those costs are eligible for a RITC, including mixed supplies under IT outsourcing contracts
• taxpayers not applying the reverse charge provisions to services provided to it by overseas based branches or associated entities, for example, information technology and administration related support services
• taxpayers applying a revenue-based apportionment methodology in cases where there are large amounts of GST-free income from large one-off overseas loans, resulting in an input tax credit recovery rate that is not reflective of the way in which acquisitions are applied in the operation of the business
• taxpayers seeking to rely on apportionment approaches agreed in historical ATO interactions which no longer reflect current interpretation
• general insurers not having adequate controls in place to verify and sense check the input tax credit entitlement of the insured used in calculating decreasing adjustments.

We encourage taxpayers to consider practical ATO guidance published in relation to:

• Application of the reverse charge provisions – findings of reviews
• Goods and Services Tax Ruling GSTR 2004/1: Goods and services tax: reduced credit acquisitions
• ATO expectations on how you support your reduced input tax credit claims on complex information technology outsourcing agreements

GST classification

We continue to see classification of products by suppliers/wholesalers and retailers that are not consistent with the ATO view. Whilst in some situations a taxpayer takes a different technical position to the ATO view, the majority of these situations are due to a lack of governance controls as part of MLC4.

In addition to controls regarding the way in which the tax treatment of supplies is determined, taxpayers should also be doing regular reviews of their product master data to determine whether any inadvertent errors have been made. The frequency of these reviews will depend on the nature of the taxpayer's business.

Recent public advice and guidance have been published to assist taxpayers with their GST classification decisions including:

• GSTD 2024/1 Goods and services tax: supplies of combination food. The Determination provides guidance on when a supply of food is a combination of one or more foods, at least one of which is a taxable food a combination food) for the purposes of paragraph 38-3(1)(c) of the GST Act.
• Draft GSTD 2024/D1 Goods and services tax: supplies of food of a kind marketed as a prepared meal. This draft Determination outlines the Commissioner's view on the meaning of 'food of a kind marketed as a prepared meal' by reference to key concepts referred to in the Federal Court decision in Simplot.
• Draft GSTD 2024/D2 Goods and services tax: supplies of sunscreen. This draft Determination explains the Commissioner's preliminary view on when a supply of a sunscreen product is GST-free.
• Updates to the Detailed Food List which included:
  • adding and updating entries that were identified as a priority through industry feedback
  • adding new entries to reflect ATO views in recent advice and compliance activities
  • updating 304 food and beverage product entries to better explain why they are GST-free.
• A new self-review guide (for medium to large businesses) for GST classification of products has been published to provide taxpayers with practical step-by-step guidance to:
  • carry out regular self-review of the GST classification of their supplies
  • assess the robustness of business system processes and controls that directly impact the decisions on GST classification of supplies.

Property

We have a continued focus on assuring the correct treatment of property transactions and supplies of accommodation including assuring that the margin scheme is applied correctly and that supplies are correctly classified in arrangements for provision of short-term accommodation by accommodation providers.

We observed the complexity in determining whether supplies were taxable as commercial residential premises or input taxed as residential premises. It is important for taxpayers to maintain all object evidence to support their positions.

Key focus areas are the characterisation of supplies, correct application of the adjustment provisions and apportionment of related costs for relevant taxpayers where there is a mix of GST treatment of supplies being made.

Recipient created tax invoices (RCTI)

In the assurance reviews we have seen some of the following issues when reviewing RCTI:

• valid RCTI agreements are not in place (separate or embedded in the RCTI)
• suppliers are not registered for GST or no longer registered and have been issued with RCTIs.

Legislative Instrument LI 2023/20, A New Tax System (Goods and Services Tax): Recipient Created Tax Invoice Determination 2023, was issued on 15 June 2023, which outlines the latest requirements for issuing RCTIs. This Determination replaces previously issued RCTI Determinations including those relating to large business entities.

We have identified situations where parties have entered into an agreement for RCTIs in respect of supplies being made on an ongoing basis, and the supplier subsequently deregisters for GST. During our reviews, we look to confirm that suppliers are registered for GST, and that there are governance controls that are in place for the taxpayer to confirm this on a regular basis.

Alignment of tax and accounting outcomes

We analyse the differences between the BAS outcomes and accounting outcomes and seek to understand and explain the various streams of economic activity and how they are treated for GST by applying the GST Analytical Tool (GAT). This provides an objective basis to obtain greater assurance.

The GAT was introduced as a compulsory element of the combined assurance review from April 2022, when we started assuring GST in the same review as income tax. We use the GAT, combined with transaction testing, to provide assurance, identify key risk areas and assess whether GST is correctly reported, other than for taxpayers predominantly making input taxed supplies. For these taxpayers, such as those in the financial services sector, we continue to undertake data and transaction testing to provide assurance for GST instead of the GAT.

Ratings

We apply a consistent rating system when reviewing and assessing the alignment of tax and accounting outcomes, which is outlined below.

Ratings

Colour indicator	Rating	Category description
	High	We understand and can explain why the various streams of economic activity and the accounting and income tax results, and accounting and GST results, vary.
	Medium	Further analysis and explanation is required to understand the various streams of economic activity and/or why the accounting and income tax, and accounting and GST results vary.
	Low	We identified concerns from our analysis of the various streams of economic activity and/or why accounting and income tax, and accounting and GST results vary.
	Red Flag	We do not understand and cannot explain the various streams of economic activity and/or why accounting and income tax, and accounting and GST results vary.

The ratings for the alignment between tax and accounting area arising in the GST assurance reviews completed are shown in graph 14.

Graph 14: GST alignment between accounting and tax assurance ratings for the most recent assurance review completed, as of 30 June 2024

We continue to observe the majority of taxpayers achieving a high assurance rating for the GAT, with 74% of taxpayers able to reconcile the accounting and GST results and able to explain any differences with reference to objective evidence.

Most taxpayers are able to complete the revenue side of the GAT and generally only seek assistance from the assurance team to complete the acquisition side.

Assistance may be required where more complex issues arise, such as differences between the GST group reporter and consolidated group, and intergroup transactions occur.

A low assurance or red flag for the GAT typically occurs where a taxpayer has made minimal or no attempt to complete the GAT. Where this occurs, a taxpayer is not able to achieve an overall high assurance rating.

We have published guidance to support taxpayers when considering the application of the GAT:

• GST Analytical Tool (GAT) FAQ
• Top 1,000 GAT example .

Data and transaction testing

We will undertake data and transaction testing for taxpayers that predominantly make input taxed supplies, such as financial services (including life insurance) industry taxpayers, in combined assurance reviews. For these entities, we don't use the GST Analytical Tool (GAT) in our combined assurance reviews but use data and transaction testing to assess correct reporting.

Data testing involves running numerous pre-determined tests against a defined data set to identify reporting errors and exceptions for further investigation or correction. Transaction testing involves tracing an identified transaction from its source documentation through to the financial reports to confirm the accuracy of the GST treatment, calculation and reporting of the transaction. Where errors and exceptions are identified, further investigation or correction will be necessary.

For financial services entities and insurers, we have published bespoke tests that can be used to get greater confidence in correct reporting, at GST data tests for the financial services and insurance industry.

GST next actions

At the conclusion of a combined assurance review, if we have identified areas of concern, we will either provide recommendations for the taxpayer to undertake or we may consider intervention through a formalised ATO next actions product.

Where a specific error or risk has been identified, we will typically make recommendations for the taxpayer to action (referred to as a client next action), and in some instances outline an expected timeline by which we will require the taxpayer to advise us of what they have done to address those recommendations.

In respect of GST, this is our most frequently used approach to addressing concerns identified. In considering what a taxpayer has done to address our concerns, we will also consider what the taxpayer has done to ensure the error doesn't continue into future tax periods, such as how governance controls have been strengthened. Where we see errors continue into future years, this would impact on our decision on administrative penalties and interest applied.

Where we identify a concern that we consider requires further ATO review, we will escalate this issue for a GST risk review or audit. Approximately 2% of taxpayers in 2024 were escalated for further ATO action in respect of GST. This was due to concerns identified with the attribution of input tax credits, and the GST treatment of related party transactions.

Appendix 1 - Published guidance

To assist taxpayers in preparing for a combined assurance review, we provide the following published guidance:

• Top 1,000 combined assurance program
• Tax risk management and governance guides  
  • Tax risk management and governance review guide
  • Tax risk management and governance
  • GST governance, data testing and transaction testing guide
  • Governance over third-party data (large super funds, managed funds and insurance companies)
• Outline of typical questions and areas of enquiry  
  • Top 1,000 – what attracts our attention
  • Typical questions in a Top 1000 combined assurance review
• GST analytical tool – Top 1,000 GST assurance program.