2.1 One significant design feature of a GST is that many entities registered for GST purposes will either occasionally, and in many cases regularly, claim refunds of GST.
2.2 It is crucial that the Tax Office has a robust system in place to process GST refunds promptly. There are three main reasons for this. Firstly, GST refunds generally reimburse GST registered entities for a tax which they should not be bearing. Secondly, any delay in paying those refunds will cause cash flow issues for these entities. Thirdly, entities that are entitled to GST refunds may face a competitive disadvantage if those refunds are not paid promptly.
2.3 It is also crucial that, where the Tax Office is not able to make a prompt payment of a refund, it has systems in place to notify affected taxpayers that their refund has been delayed.
2.4 In 2003-04, some 1.89 million GST returns (known as Business Activity Statements (BASs)) were lodged which claimed a total refund of about $22 billion. Most of these refunds are automatically computer-processed, unless they are identified for manual checking.
2.5 The Tax Office states that, during 2003-04, it processed 94.4 per cent of all activity statement refunds within 14 days of all relevant information being provided. The Tax Office's performance compares favourably with other OECD countries
2.6 Activity statement refunds are not just made up of GST refunds. They also consist of refunds of other types of tax, including refunds of income tax to entities that are not registered for GST. The Tax Office does not have management information systems which state how many activity statement refunds that include GST refunds are processed within 14 days of lodgment, or within 14 days of all information being provided.
2.7 The Tax Office has information which shows that, during 2003-04, 4.3 per cent of all BAS refunds were stopped for manual checking. These stopped refunds amounted to approximately $20 billion in dollar value and represent about 90 per cent of the total value of BAS refunds claimed.
2.8 The Tax Office has systematically stopped these 4.3 per cent of BAS refunds to determine, in a manual intervention, whether they should be further checked or otherwise reviewed prior to release of the refund.
2.9 Refunds to Government organisations and large ongoing businesses have been delayed for manual checking under these procedures.
2.10 After checking, most refunds are ultimately paid by the Tax Office. In some cases the amount of the refund is reduced. If paid after 14 days of all relevant information being provided, the Tax Office is required to pay delayed refund interest to the taxpayer.
2.11 The processes involved in checking stopped refunds have not resulted in the identification of a significant number of GST refund fraud cases.
2.12 As well, the Tax Office has indicated that, for large business taxpayers, during 2003-04 only $14.5 million in additional tax was recovered as a result of stopping and checking $7.35 billion of GST refunds. For Government and community sector taxpayers, only $0.1 million in additional tax was recovered after stopping $7.16 billion of GST refunds. For small business taxpayers, the Tax Office indicated that $178.5 million of GST adjustments was achieved from pre-issue reviews of around $5 billion of GST refunds. A further $82 million of GST adjustments was recovered from small business taxpayers as a result of more detailed audit activity on refunds stopped for checking.
2.13 In all, some $275 million (approximately) has been recovered from pre-issue reviews of $20 billion of GST refunds. The additional tax recovered as a result of the practice of stopping and checking refunds was 1 per cent of all stopped refunds.
2.14 The majority of refunds stopped for manual checking are subsequently released and are refunded within 14 days of lodgment.
2.15 The Tax Office does not have management information to show the time it takes to process all GST refunds from the date of lodgment to the time of payment. It also has no information to show the time it has taken to process particular kinds of refunds (such as those which have been stopped for manual checking).
2.16 The Tax Office's management information systems currently only operate to monitor the length of time a GST refund spends within particular areas of the Tax Office. This monitoring starts from the time the refund has reached the particular area. However, there is no monitoring of the time that a GST refund spends in the area of the Tax Office which processes GST refunds after they have been cleared for payment.
2.17 The Tax Office states that BAS refunds not issued within 14 days are issued within a median time of approximately 30 days, where the refund is not subject to a detailed field audit.
2.18 The Tax Office has had a program which is chiefly aimed at stopping for manual checking all large refunds and refunds claimed by businesses and other entities lodging a BAS for the first time. Although the Tax Office has developed and is implementing improvements to this program, the Inspector-General considers that further improvements are required.
2.19 Overseas experience highlights that in the early stages of a GST there will be a propensity for some persons to fraudulently claim GST refunds.
2.20 Certainty in receiving refunds in a reasonable time is often critical for business and other entities in funding their working capital needs to run their enterprise. The Inspector-General believes that the Tax Office needs to better understand the risk profile associated with specific GST refunds and to move to a post-issue review of refunds where appropriate. The Inspector-General does not believe that the adjustments currently being recovered by the Tax Office justify current delays in holding up of the dollar value of refunds.
2.21 The Tax Office has advised that it agrees with the general thrust of the Inspector-General's approach and is currently changing procedures in certain of its business line areas. Through these changes it is seeking to better respond to the risk profile of GST refunds. These changes include changes to improve the processes under which it advises taxpayers of the status of their GST refunds, including cases where the refunds may be offset against other tax debts.
2.22 The following key recommendations are made to address unresolved problems identified by this report:
- The Inspector-General recommends that the Tax Office improve its systems to better match the risk issues associated with paying GST refunds. These systems need to achieve a better balance between paying GST refunds in a timely manner and preventing fraudulent or incorrect refunds from issuing.
- The Inspector-General recommends that the Tax Office establish 'whole of office' systems which measure the total elapsed time for the payment of GST refunds.