Practical implications for banks of the GST self-assessment regime
Banking on Tax, Issue 9
Recent changes to the GST law will potentially make it more difficult for entities in the banking industry to revise the amount of input GST claimed from the ATO for past tax periods.
Self-assessment regime for GST and other indirect taxes
From 1 July 2012, all GST taxpayers became subject to a self-assessment regime, whereby GST and other indirect tax liabilities and entitlements are dependent on (i.e. are crystallised by) an assessment made by the Commissioner of Taxation. This change was made to replace the ‘self-actuating’ system (under which GST and other indirect tax liabilities and entitlements could exist independently of an assessment) with a system more closely aligned to the self-assessment regime for income tax.
Summary of key changes for GST taxpayers
For GST taxpayers, the changes made to the Taxation Administration Act 1953 (by the Indirect Tax Laws Amendment (Assessment) Act 2012) now mean, among other things, that:
- A taxpayer is only liable to pay the GST liabilities or entitled to receive the entitlements stated in their assessment
- The Commissioner is taken to have made an assessment of an amount determined in a GST return on the day the return is lodged by the taxpayer. The return is treated as the notice of assessment and is conclusive evidence that the assessment is correct
- The Commissioner may make an assessment if the taxpayer fails to lodge a return
- Once the liability or entitlement has been assessed, there is no time limit imposed on the Commissioner to recover unpaid amounts or the taxpayer to be paid an amount
- Once an assessment has been made, a four-year period of review applies, during which time the Commissioner may amend a taxpayer’s assessment, either at the taxpayer’s request or at his own discretion. Multiple amendments may be made in the period of review
- An amendment to an assessment gives rise to a refreshed period of review for the “particular” that is amended (i.e. a further four years from when the taxpayer is given a notice of amended assessment for the last amendment made to the “particular” during the period of review). The explanatory memorandum states that a particular is “a constituent element that affects an increase or decrease in the assessable amount and in the context of GST, could be a single supply or a single acquisition provided it individually results in a change to the assessable amount”. The refreshed period of review for a particular cannot be extended. An assessment may be amended during the refreshed period of review only once in relation to a particular
- The four-year period of review can be extended in limited circumstances (but only on the Commissioner’s initiative, and only because the Commissioner has begun an examination of the taxpayer’s affairs that he will be unable to complete before the end of the review period)
- Taxpayers cannot use ‘stop-the-clock’ letters to preserve entitlements beyond the four-year limit, for entitlements relating to tax periods that start on or after 1 July 2012.
Practical implications for banks
For most GST taxpayers, at least for now, the move to the self-assessment regime has resulted in no practical change to what was required under the self-actuating system (i.e. lodgement of a monthly or quarterly GST return together with payment of the net amount calculated in the return ─ if a positive amount). For entities in the banking sector, however, the impact of the change is likely to become increasingly significant as time goes on.
Banks and other financial institutions commonly make a mixture of ‘input taxed’ financial supplies, and supplies that are ‘taxable’ or ‘GST-free’. The input taxed supplies generally limit the extent to which input tax credits can be claimed for the GST included in the cost of business inputs acquired by a bank. Banks typically determine the extent to which their acquisitions (and therefore the associated input GST incurred) relate to the making of input taxed supplies by designing and applying an ‘apportionment’ methodology. The apportionment methodology allows a bank to calculate the proportion of its input GST costs that are claimed back from the Commissioner in a GST return. In most cases, however, banks subject their apportionment methodology to ongoing review and revision to achieve the highest rate of input GST recovery, fairly and reasonable determined. The revised methodology may be applicable to prior tax periods. Banks would generally rely on a stop-the-clock notice to preserve entitlement to an increased level of input GST recovery, while the bank finalises the revised methodology, obtains the Commissioner’s sign-off (often a very protracted process, potentially taking several years) and prepares the revised GST returns.
However, stop-the-clock notices are not a feature of the new self-assessment regime and, as they can now only be used to preserve pre-1 July 2012 entitlements, are of diminishing utility. Effectively, by 1 July 2016, unless a revised GST return that takes into account the revised apportionment methodology is lodged within the four-year review period for each affected tax period (or a private ruling application has been made within the four-year period), any increased entitlement will be lost.
What should banks be doing?
Entities in the financial services sector will be more greatly affected by the removal of the stop-the-clock notification process than entities in other sectors. Therefore, banks should now be focusing their efforts on determining whether an alternative, fair and reasonable apportionment methodology could give them an improved level of input GST recovery. If the methodology can be applied to past tax periods, steps should be taken to apply it appropriately. This would generally involve lodging a stop-the-clock notice for pre-1 July 2012 tax periods within the four preceding years, and working to ensure that the methodology is finalised and the Commissioner’s sign-off obtained as soon as possible.
Into the future, banks will still benefit from continuing to review and revise their apportionment methodologies, but beyond 30 June 2016, it will not be possible to capture retrospective benefits beyond the four-year statutory limit.