GST analytical tool

How relevant is the GAT in the overall scheme of GST reviews?

It is not clear from the guidance what the impact of the assurance rating for the GAT has on the overall assurance rating for GST justified trust. The ATO's explanation of the minimum expectations for governance ratings to achieve GST justified trust assurance stage ratings in the GST Governance, Data Testing and Transaction Testing Guide has been very useful for taxpayers to determine their approach to GST governance. We suggest that a similar approach would assist taxpayers understand the importance of the GAT to GST justified trust and guide their approach to it.

Historically, there has been a great deal of inconsistency in how the GAT has been requested during Top 1,000 GST assurance program reviews (SARs), with variances from not being requested at all to it being requested with extensive scrutiny and it solely impacting a Stage 2 to 3 rating. The ATO must ensure that the methodology is applied consistently amongst taxpayers.

It would be helpful if more detail could be provided by the ATO about the skillset of the GAT team who will provide comment on the appropriateness of variances and assign any risk ratings. The taxpayer should have comfort that those at the ATO are sufficiently knowledgeable about the variances between accounting and tax treatments.

The GAT is one of the ways we satisfy the fourth focus area of the justified trust methodology in understanding why the accounting and tax results vary.

A GAT analysis is required for the Top 100 GST assurance program (other than predominantly input-taxed industries).

In the Top 1,000 combined assurance program reviews (CAR) we require the GAT to be completed for all taxpayers that predominantly make taxable supplies. Taxpayers in the financial services industry that is banks and insurance entities, the property sector, and/or with very complex structures will be considered on a case-by-case basis.

The Top 100 and Top 1,000 GAT examples demonstrate our intended approach to the GAT for each program. We have set out below the considerations that underpin a GAT rating as well as the interplay between the GAT and the other focus areas in a GST assurance review.

We have established GAT support networks across both the Top 100 and Top 1,000 GST assurance programs to support our case teams in the application of the GAT and to facilitate a consistent approach across each program. These networks include accounting specialists.

It is important to note that the GAT should not be looked at as a standalone measure. The fourth focus area is interconnected with the other focus areas - that is, we will seek to obtain assurance over adjustments derived through the GAT through other focus areas of the review.

We will work collaboratively with taxpayers who have particular challenges with completing the GAT by helping them to find solutions using information from their existing systems as well as information we have gathered from our income tax assurance reviews. This includes working with our accounting specialists.

If we take the view that a GAT should form part of the GST assurance review, it will be taken into account when determining the overall level of assurance, including when a GAT analysis is not performed. However, in determining the level of assurance for the fourth focus area and the overall level of assurance, we will also consider what other objective evidence is available in order to understand and explain the variance between accounting and GST results. We recognise that the GAT is a tool and a means by which an understanding as to the accounting and tax variances under the fourth focus area can be achieved, but it is not the only means by which this can be achieved.

This is the staged rating system we use for the fourth focus area:

Stage 3

We understand and can explain the various streams of economic activity and why accounting and GST results vary and this understanding is sufficiently supported by objective evidence.

Stage 2

We do not fully understand why accounting and GST results vary or this understanding is not sufficiently supported by objective evidence.

Stage 1

We do not understand why accounting and GST results vary.

Red flag

We do not understand and cannot explain the various streams of economic activity or why accounting and GST results vary.

Not rated

We have not assessed the various streams of economic activity or why accounting and GST results vary using the GST analytical tool.

A Stage 3 rating for the fourth focus area is practically achievable and will depend upon factors such as:

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the extent to which adjustments can be assured directly from the audited financial statements such as depreciation, amortisation, employee expenses, interest, and disposals or acquisitions of capital assets sourced from the income statement, balance sheet, cash flow statement and notes

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the ratings in respect of assurance work undertaken in relation to transactions or specific tax risks such as GST-free sales and input-taxed supplies that may form part of the variance between the income statement and Labels 1A and 1B

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our level of assurance in respect of tax risks flagged to market in so far as they may apply to adjustments referable to the variance between the income statement and Labels 1A and 1B

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objective evidence provided to verify the values disclosed for other adjustments. This could be in the form of general ledger (GL) codes in trial balances that are mapped to the audited financial statements which could form the basis of sample testing.

The assurance rating assigned to the fourth focus area will be a matter of professional judgment. It will not be required that all individual adjustments need to be at Stage 3 as a precursor to an overall Stage 3 for the fourth focus area, however this will depend on the nature of these adjustments.

The Top 100 and Top 1,000 GAT examples demonstrate this approach where the GAT is applied.

After obtaining feedback from various forums and organisations (both internally and externally) we will not be proceeding with the GAT-Lite concept.

However, the GAT is a compulsory component of a CAR for taxpayers who predominantly make taxable supplies. The GAT is not intended for use by taxpayers who predominantly make input taxed supplies that is those in the financial services industry. For taxpayers who predominantly make input taxed supplies we will undertake data and transaction testing. Taxpayers in the insurance and property sectors or with very complex structures will be considered on a case by case basis.

It was discussed that the ATO would view application of the GAT by a taxpayer independent of the SAR process as evidence of good governance. In terms of frequency, would an annual calculation be appropriate for this purpose or is it expected that it is undertaken more regularly?

An annual calculation is sufficient to contribute to the highest possible rating for Managerial Level Control 7 - Procedures to explain significant differences.

Taxpayers are welcome to apply an equivalent calculation more regularly at their discretion.

While we can make our best efforts to determine and assure the basis of the adjustments based on information requested from taxpayers, we still require taxpayers to work with us in order to understand the nature of financial accounts, ascertain the information required, explain variances and validate any proxies used.

The interconnectivity between the GAT line adjustments with the balance of the assurance review means that this assurance work will be progressed in conjunction with the other 3 focus areas of the assurance review.

It is understood that the GAT is not intended to apply in input taxed businesses. Guidance should be given as to whether this also includes say, financial services businesses that make GST-free supplies (that is, as a result of offshore supplies). What proportion of supplies need to be input taxed for the GAT to not be applied?

Where your business is substantially diversified across input-taxed and non-input taxed segments or divisions we will generally apply the GAT.

Industries that are predominantly input-taxed are excluded from the current GAT.

With respect to the Top 1000 in a CAR, taxpayers are expected to compete the GAT themselves. Case teams are always available to assist taxpayers in this process where required.

We will in both the Top 100 and Top 1000 work collaboratively with taxpayers to complete the GAT.

However, there is an expectation as part of good governance and in relation to managerial level control (MLC) 7 that a taxpayer has a process in place to explain BAS reporting of GST payable and GST receivable compared to business outcomes, any variances in comparison to financial statements (for instance, through the regular application of the GAT).

Is it possible to have something in the early notification letter to indicate examples of objective evidence?

In the Top 1,000 program, the RFI has been recently amended to request the trial balance and financial statements. The RFI will be sent with the early notification letter.

However, we can also consider fixed asset registers, internally generated coding reports or income tax return working papers if we have a high level of confidence that we can rely on these materials.

Some GAT line adjustments will also be assured through assurance work undertaken in other focus areas such as transactions or specific tax risks.

It may also be possible that taxpayers utilise existing tax coding to classify transactions taking place within a GST group.

If reverse-charged amounts do arise, they can be adjusted for under Step 4 of the GAT method.

This will result in an income statement related adjustment to align with GST reporting.

Transactions or specific tax issues analysis will be in respect of a 12-month period.

In the Top 100 correct reporting testing will generally be in respect of a 3-month period used as a representative sample of a 12-month period.

For the Top 1000 we verify transactions through a review of the BASs for months 1, 6 and 12 of the review period together with a review of new, significant and specific issues for the 12-month review period.

What is the materiality threshold for GAT in GST reviews?

Will the ATO apply a pragmatic approach and accept a small margin of error when applying the GAT versus expecting a full reconciliation of the BAS to the accounts?

Materiality is not an appropriate concept as the purpose of the GAT is to understand the variances.

The assurance rating in respect of the GAT where it is used to satisfy the fourth focus area is based on the application of professional judgment and takes into account the following 4 key factors:

1.

level of our understanding of reasons for variance between accounting and GST results

2.

level of objective evidence provided by the taxpayer where there are gaps in our understanding

3.

an assessment of the unexplained net GST dollar variance

4.

an assessment of the effective net GST rate.

The first 2 factors are the most significant factors in determining the GAT and the fourth focus area rating. We do not expect a full reconciliation of the BAS to the accounts. Qualitative explanations provided by the taxpayer in respect of the variances and the suitability of evidence provided will be considered.

We will assess on a case-by-case basis and using professional judgment whether the explanations provided by the taxpayer in respect of variances are reasonable and whether these explanations align with our understanding of the business of the taxpayer and its industry.

The work to date demonstrates that the principal benefits derived from the tool are increased assurance of the GST outcomes of economic performance in 5 ways:

1.

providing an understanding of a taxpayer's GST profile

2.

identifying key drivers of GST performance

3.

increased confidence that non-routine transactions are captured and that the BAS outcomes and disclosures are consistent with the financial statement disclosures

4.

assisting to assure the GST outcome of transactions from information set out in the audited financial statements such as income statement, balance sheet, cash flow statement and notes to the accounts

5.

audited financial statements assist in providing assurance in relation to quantum of GST-impacted transactions.

We would expect taxpayers to be comparing BAS disclosures to financials as part of good tax governance.

The initial divergence as between the income statement and the BAS disclosures is not determinative of an assurance rating.

The fourth focus area rating is based on whether adjustments are well explained, linked to appropriate evidence, or assured through other focus areas.

In both the Top 100 and Top 1,000 assurance programs, the overall fourth focus area rating is based on the extent to which adjustments are well explained, linked to appropriate evidence, or assured through other focus areas.

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income statement adjustments were relatively simple to extract

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revenue analysis was relatively straightforward to undertake in most industries

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balance sheet movements appropriately reflected the majority of timing differences between GST and accounting

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cash flow statements and notes to the accounts are useful in assuring revenue and expense GAT adjustments.

However, there are some challenges we have observed to date including reconciling complex grouping variances, and the quantification of some differences (that is, long-term construction contracts or mixed accounts where GST-bearing or non-GST bearing amounts are difficult to separate and quantify).

We continue to work with our taxpayers collaboratively through these challenges supported by the GAT support networks across each program.

The use of proxies was discussed during our consultation session. In relation to the detailed examples that will be provided for the Top 100 and Top 1,000 population, it would be helpful if these can address the use of proxies including commentary as to the ATO's views on the use of such proxies.

Where there are difficulties in calculating adjustments without analysing transactional data, is this considered when assigning the assurance rating for the fourth focus area?

We will consider the use of proxies or assumptions (for example, using an average foreign currency translation rate instead of daily) where they are appropriate and relevant. We will also consider sample testing invoices in relation to transaction accounts with entries referable to GST bearing and non-GST bearing amounts.

Where taxpayers are periodically reconciling to the management accounts, this will assist in the application of the GAT in terms of identifying and assuring the reasons for the variances as between the income statement and the BAS.

It would be helpful if the ATO could provide further explanation as to what GST risks the exercise is looking to address, particularly where detailed transaction testing is completed. The GAT simply identifies transactions that are included or omitted from the BAS compared to the financials. As such, where there has already been assurance provided over the accuracy of transactions and reconciliation of BAS data to GL, the additional requirement to reconcile the GL to the GAT can be seen as onerous.

The GAT, as a top-down assurance approach, is designed to unpack the financial statements for the purpose of understanding the GST outcomes of the taxpayer's economic activity as reflected in the income statement. The GAT provides greater insight and visibility through a more granular understanding of revenue and expense categories.

Our data analytics and e-audit testing is a bottom-up approach and focuses primarily on accounts payable and accounts receivable.

The GAT allows us to:

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focus on specific risks for further analysis

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facilitate the comparison of BAS disclosures to the audited financial statement disclosures

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identify GST-impacted transactions outside the accounts payable and accounts receivable modules (that is, GST adjustment events).

It would be helpful if the ATO could publish any benchmarking of findings and variances so that taxpayers can have clarity on what may be considered reasonable and what findings result in which ratings.

Our observations will continue to be published in our Annual Findings Report.

GAT methodology will be applied to the incorporated joint ventures just as it would have to any other corporate GST group.

GAT methodology will not be applied to unincorporated joint ventures.

In the absence of GAT for unincorporated joint ventures, we may need to conduct up to 12-month data testing for the unincorporated joint venture GST groups included in the scope of the overall GST assurance review.