July 2003 marks the 3rd anniversary of the introduction of GST - a landmark piece of legislation which dramatically altered the Australian tax landscape. Despite its turbulent political beginnings, the GST has become an accepted part of life for business - and the Tax Office was careful to ease business into the changes wrought by the new tax system. Companies could be forgiven for thinking that all is well in the new GST order...
However, if business believes the initial flurry of change which accompanied the introduction of GST was onerous, then research from other countries which have introduced a similar tax will send a shiver down the spine. Each and every country which has implemented such a tax has seen an explosion in related audits, litigation and disputes. Having survived a tumultuous implementation phase, we have experienced an eerie stillness on the GST front - lulled into a false sense of security by a regulator which initially undertook "friendly visits" rather than audits. However, the winds are beginning to change - and businesses must act now to secure themselves against the imminent storm.
Many companies will have had a friendly visit from the ATO and, consequently, that is their GST experience. However, if businesses were to get an ATO visit in the next six months, it would be a substantially different experience. The tone of the relationship has changed, and a new stage of GST audit readiness is necessary for businesses to take a proactive role in the relationship. Unlike corporate tax, which is driven by a tax on profit, GST is a tax on turnover on both the input and the output side of business. The implication for compliance is that any error made becomes easily multiplied as a function of turnover, and easily multiplied over time. Looking back over whatever the period of an audit may be, small problems can rapidly grow to "telephone book" numbers.
Companies must actively review their levels of compliance - or face the consequences. Giving evidence before a Senate Estimates Committee earlier this year, the Commissioner of Taxation said: "I have signalled that in the new financial year we are moving to a new phase of the bedding in of the system".
At the same time, his GST Deputy Commissioner said: "We are still moving through that phase of verification checks and are yet really to move into what I would call the full in-depth audit phase. That is starting now, as income tax returns that cover the first year of GST are coming in."
The ATO was allocated an explicit Federal Budget appropriation of $1.5bn over four years for GST activities. The government's revenue expectations would be returns of at least three, and perhaps five times that figure. The ATO has been actively recruiting resources at senior levels across various taxation areas. Taxpayers now face an increasingly well-resourced and motivated regulator as it moves to the next phase of its attack. Looking at the ATO, we are seeing a heightened level of audit activity. Auditors are staying longer and examining issues more closely. There is a well-defined series of rulings now where the ATO is taking a tougher stance in relation to a number of items. The mindset of "revenue protection" has well and truly returned. And all of this has been borne out by the Commissioner's recent announcements about the ATO's 2003-04 large business compliance program. He has flagged that a range of verification checks, and audits will be undertaken for GST including: 30 comprehensive audits; 1,200 issue audits; 200 BAS integrity audits; 700 refund integrity audits; and 300 non-lodgment checks.
The likelihood that GST disputes are set to rise is confirmed by international experience, which reports that consumption tax litigation dramatically and suddenly increases after a peaceful introduction. The UK's experience with the introduction of the Value Added Tax (VAT) saw the number of disputes remain low for a number of years before suddenly taking off in a torrent of litigation - it took more than seven years to reach the first 1,000 UK VAT Tribunal decisions, five years to reach the next 1,000, three years the next 1,000 and then 10 months. There was a frenzy of activity over the next few years which then slowed - but still it takes only one to two years for the Tribunal to rack up another 1,000 decisions. VAT disputes typically comprise about 30 to 40 per cent of all tax litigation in the UK - but in the first two decades of the VAT's existence, this figure was a relatively low 10 per cent.
Perhaps armed with UK jurisprudence, our New Zealand neighbours hit the courts and tribunals much more quickly. In the five years following the introduction of that country's GST in 1986, disputes relating to the tax accounted for less than 10 per cent of all tax cases. Since 1991, however, NZ GST cases have accounted for an average 29 per cent of all tax cases. The anticipation is that GST disputes will account for 30 to 40 per cent of tax litigation in Australia within the next two to three years, and that this will remain high for at least the following decade.
Being GST audit ready can no longer be just a strategy for Australian companies - it must become the new reality The ATO is looking at 100 per cent audit coverage of Australia's top 1,000 businesses. For big business, a GST audit is no longer a matter of if - rather a matter of when.
Bigger companies must accept that they will face an audit - and it will be conducted without the friendly tone of the education phase. The chances are, if a business is in the top 100 Australian businesses, it will already have had its visit. For bigger businesses who have not yet been approached, it might even make sense to actually bring on or bring forward a GST audit or review.
Companies should assess the benefits of having some say in the timing of the audit, and potentially engaging with the ATO before the environment turns overtly hostile. The climate for penalty remissions will never be better than it is at this moment. If a business fails to adequately prepare, there is a very real chance it could become embroiled in a GST dispute.