NSW Audit Office - Financial Reports - 2004 - Volume 5 - Complaince Review of Aspects of a New Tax System

Compliance Review of Aspects of a New Tax System (Goods and Services) Act 1999 The Goods and Services Tax (GST) began on 1 July 2000. At the time, for many government agencies, GST was the largest and most demanding tax they had encountered. As a result many needed to update their systems and train their staff in the requirements of the legislation. Like businesses in the private sector, public sector agencies must be registered for GST. Agencies must forward to the Australian Taxation Office (ATO) the GST they collect as part of the sales of their goods and services and other taxable supplies. They may also be able to claim input tax credits for GST included in the price of good and services they purchase. Any deficiencies in the manner in which they deal with GST could result in the overpayment/underpayment of tax, ATO penalties and/or cash flow problems Like businesses in the private sector, government agencies are subject to audits by the ATO. CONCLUSION With one exception, the 18 agencies we reviewed rated satisfactorily when compared with best practice. The accounting system at NSW Fire Brigades cannot handle GST and as a consequence numerous manual processes are required for them to meet their GST obligations. Despite the fact that not all GST processes in the agencies reviewed were best practice, there was no evidence to suggest that they are not meeting their GST obligations. KEY FINDINGS Almost a quarter of the agencies reviewed had not undertaken a risk assessment and put in place a management strategy to minimise the risk of failing to meet their GST obligations. The qualifications and levels of experience of officers dealing with GST matters was satisfactory. Administrative restructures, which happen frequently in the public sector, put the agencies involved at risk of not complying with their GST obligations. In many agencies for different aspects of GST, computerised systems were not being used or were incapable of being used. In a couple of agencies this was due to the age of the Financial Management Information System (FMIS). RECOMMENDATIONS We recommend that agencies: undertake a risk assessment of GST obligations, if not already done make as much use as possible of automatic processes of their FMIS in accounting for GST be alert to the risks associated with administrative restructures. We recommend that NSW Fire Brigades upgrades its FMIS. Auditor-General’s Report to Parliament 2004 Volume Five 5 Compliance Review of New Tax System (Goods and Services) Act 1999 DETAILED FINDINGS We segmented the whole of the processes for accounting for GST into various risk areas and compared the controls in place at each agency to ‘best practice’. Any gap between the two does not necessarily imply that a deficiency exists. It is more an opportunity to strengthen existing controls. The cost of enhanced controls however must not outweigh any benefits accruing. GST Risk Management Strategy We looked at whether each agency had identified the risks associated with its GST obligations and put a strategy in place to minimise those risks. At the time of the review, we found three agencies (NSW Fire Brigades, Department of Energy, Utilities and Sustainability and the Crown Solicitor’s Office) had not done this. Eraring Energy, Sydney Catchment Authority and State Forests were in the process of developing a risk profile. Except for State Forests, the remaining five agencies had developed an overall risk strategy, but GST did not feature in the strategy. Post Implementation Review It is good practice to formally review how well system implementations progressed. The information gained can help finetune the current project as well as give suggestions for future system changes. Most of the agencies we reviewed undertook a post implementation review of their GST processes. Those that have not are: NSW Fire Brigades State Forests Sydney Catchment Authority. Administrative Restructures The Department of Energy, Utilities and Sustainability is the only agency in our sample where a recent restructure has occurred. The new department was formed on 1 July 2003, with its accounting functions provided by the Department of Infrastructure, Planning and Natural Resources (DIPNR). A restructured agency has three months from the date of gazettal of the name change to adjust its order forms to ensure suppliers are using its new name when issuing invoices. Following a review by the ATO, it was determined that 68 per cent of invoices paid up to February 2004 were in the incorrect name. The ATO has advised DIPNR that no action will be taken against it. The Department could have been heavily penalised. Management Controls We discovered a high degree of compliance with best practice in regard to the level of experience of staff responsible for GST transactions in all agencies. Transaction Management Suggested controls in this area include: nominating a particular agency officer responsible for settling GST classification issues of individual transactions; documenting GST positions taken; maintaining logs of GST issues as they arise and recording the outcome of investigations; having written policy documents for retention and destruction of tax records; nominating limited staff to deal with the ATO and seek rulings from the ATO. Most agencies complied with best practice. Macquarie Generation, however, has only documented its post implementation GST positions where external advice had been received and allows multiple officers it deems appropriate to deal with matters with the ATO. NSW Fire Brigades has not documented its GST positions and has only maintained an issues log since April this year. Neither the Crown Solicitor’s Office and State Forests were maintaining issue logs. 6 Auditor-General’s Report to Parliament 2004 Volume Five  Compliance Review of New Tax System (Goods and Services) Act 1999 Transitional Provisions Contracts existing prior to the GST are subject to transitional provisions and can be GST-free. Best practice suggests that these contracts should be clearly identified in the FMIS and regularly reviewed to ensure that the concessional tax treatment still applies. Contracts can cease being GST-free if a ‘review opportunity’ arises that provides for a change to the consideration to take account of GST. Regular reviews are not being done at the Department of Health and NSW Police. The FMISs at the Department of Education and Training and the NSW Fire Brigades are not capable of identifying these contracts. The Department of Education and Training believes it has alternative procedures in place. FMIS Controls Some system controls may not be practical or affordable in smaller agencies and manual processes with effective controls in place may be a viable alternative. In some instances, although the system is capable of performing the control, agencies have elected to use manual processes. Best practice suggests: regular interaction between the IS group within an agency and the GST manager a broad spread of knowledge and responsibility for GST reporting in the FMIS the accounting system should be fully integrated and automated system access should be monitored system prompts be in place to ensure transactions and tax types are processed correctly FMIS should be backed-up regularly ABN/GST registration details must be part of customer’s master records System can identify duplicate customers by name and/or ABN. At NSW Police, the GST Accountant prepares the Business Activity Statement (BAS). We were informed at the time of our review there was nobody else with the skills to act as back-up if the accountant is unavailable. The department has advised us that another officer has since been trained. We noted two agencies (NSW Fire Brigades and Crown Solicitor’s Office) where feeder systems to the accounting system are used. The variation from best practice is that manual adjustments can result in errors, whereas this is less likely with systems that are fully integrated and automated. System prompts can assist transactions to be processed correctly. Limited or no prompts exist in the FMIS used at the Department of Education and Training, NSW Fire Brigades and the Crown Solicitor’s Office. The FMIS cannot identify duplicate suppliers at the Department of Education and Training and the NSW Fire Brigades. Purchase and Sale Controls Best practice suggests that guide cards, perhaps in the nature of decision trees, should exist to help accounts staff make the correct decision regarding the classification of sales and purchasing transactions for GST purposes. Where possible these should be hard-coded into the FMIS. Senior officers should review unusual transactions to ensure they have been correctly classifed. Guide cards and/or hard-coding are not part of the FMISs at the Department of Health, Landcom, NSW Fire Brigades, Crown Solicitor’s Office and the Department of Education and Training. However, each agency believes it has adequate manual processes to compensate. Manual processes are not considered to be best practice. Auditor-General’s Report to Parliament 2004 Volume Five 7 Compliance Review of New Tax System (Goods and Services) Act 1999 1. Purchase Transactions Under this heading, we looked at the controls in place when agencies pay for the goods and services and the assets they purchase. We also looked at some less common transactions like those associated with imported goods and services and grant payments. A tax invoice that does not contain all necessary details is not valid. Our review included purchases made by credit card, as well as through accounts payable systems. All agencies had controls in place to check the existence of these details. However, the Crown Solicitor’s Office accounting system cannot do this, so they must do it as a manual process.