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

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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 ...

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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. Best practice suggests that automated systems should be used to the greatest extent possible when accounting for GST. Manual adjustments allow errors to occur. With this in mind, we specifically reviewed what happens when the system highlights that an ABN is not disclosed on a tax invoice. The vast majority of agencies indicated that they do not deal with suppliers who do not have an ABN. We noted, however, systems used by three agencies (the Independent Commission Against Corruption (ICAC), State Forests and Sydney Water Corporation) do not have the capability to flag invoices where there is no ABN quoted or the agency chooses to apply manual processes. We also observed five agencies (Crown Solicitor’s Office, Department of Education and Training, Department of Energy, Utilities and Sustainability, NSW Fire Brigades and NSW Police) that allow manual purchase orders to be raised. In addition many agencies that use system generated purchase orders allow the orders to be subsequently amended, if required. The FMIS system should be used to ensure that input tax credits are claimed in the correct reporting period for accrual basis taxpayers. Systems at State Forests, NSW Fire Brigades, ICAC and Landcom cannot perform this function. While purchases from overseas occur only rarely, six agencies did not have documented procedures dealing with such things as the conversion date and exchange rates to be used. Agencies must be alert about over-claiming input tax credits. Their systems should be set up to ensure this cannot happen. Adjustments to GST amounts because of rebates or discounts offered by suppliers should not be a manual process. Systems at NSW Police, NSW Fire Brigades and the Department of Health cannot do this or the agency has elected to use manual processes. Systems should also be set up to automatically deny input tax credits when the nature of the expenditure does not warrant the credits. Systems at the following agencies do not do this or the agencies have decided to rely on manual processes: Department of Education and Training Health NSW Fire Brigades State Transit Authority Sydney Catchment Authority. Contracts usually commit agencies to expenditure on a much larger scale than payments for goods and services. Best practice requires agencies to: use standard contracts that address all GST matters; have all contracts reviewed by their legal section or by the Crown Solicitor; and ensure that their legal section is aware of GST obligations and remains in contact with GST officer. The agencies we reviewed were mostly undertaking these practices. The exception is the Department of Health where new contracts for less than $250,000 are not referred to the legal section for perusal. 8 Auditor-General’s Report to Parliament 2004 Volume Five  Compliance Review of New Tax System (Goods and Services) Act 1999 The making of grants was an activity conducted in five of the agencies in our review. Best practice is for agreements to be in place with recipients of grants for them to prepare recipient created tax invoices. The Department of Energy, Utilities and Sustainability uses agreements, but does not monitor the receipt of compliant agreements back from grant recipients and does not have controls to ensure whether the GST status of recipients has changed. 2. Sale Transactions Our review disclosed no major departures from best practice in the way agencies are accounting for GST in regard to export transactions (not a high level activity) and asset retirements. At the NSW Fire Brigades, the GST officer is not made aware of bad debts, due to the limitations of the FMIS. 3. Other Transactions We reviewed controls associated with financial supplies (loans, dividends, interest) and non- monetary consideration. The number of these types of transactions in agencies is generally not high. Input tax credits in relation to financial supplies need to be blocked by hard-coding in the FMIS. At the following agencies this either was not possible in their systems or the agency chose to use manual processes: Eraring Energy, Sydney Catchment Authority, Department of Education and Training, NSW Fire Brigades, Sydney Water Corporation, Energy Australia and Department of Health. In the public sector, a transaction where no payment is exchanged can occur, for example when an asset such as land is transferred to another agency in exchange for a reduction in debt owing to the Treasury. These transactions are sometimes difficult to capture in the FMIS as no payment is required to be generated. GST obligations can then be easily overlooked. Best practice suggests that the GST officer must be active in pursuing these transactions throughout the agency. This role is carried out in all but one agency, NSW Fire Brigades. Alternatively, agency management must be alert to these transactions and pass the information onto the GST Officer. BAS Preparation and Reconciliation Controls In the agencies we looked at, best practice was achieved in regard to the expertise of the people preparing the BAS and signing-off the BAS. Checklists and supporting documents were prepared and retained in all agencies. In the agencies in the table below, we noted manual amendments to the documents supporting the BAS. Manual adjustments are not considered to be best practice. Ideally, the FMIS system should be able to produce all entries on the BAS. Eraring Energy NSW Fire Brigades Crown Solicitor’s Office State Forests Department of Education and Training Sydney Catchment Authority Department of Health Sydney Water Corporation Auditor-General’s Report to Parliament 2004 Volume Five 9 Compliance Review of New Tax System (Goods and Services) Act 1999 General Ledger and Journal Controls Here we looked at: whether GST reconciliations to the general ledger were performed regularly; whether they were prepared on a consistent basis (cash or accrual); the preparation and review of journal entries and the role of the GST officer in the process, particularly in regard to unusual transactions. The controls in all tested agencies accorded with best practice, except at NSW Fire Brigades where the GST officer is not consulted regarding any unusual transactions. Staff Training for GST Best practice requires agencies to: have their GST procedures documented and accessible to all staff; ensure the name of the GST officer is known to staff; and have a formal staff-training plan in place with regular updates available. The first aspect is being satisfactorily addressed by all agencies except the NSW Fire Brigades. All agencies claim that their staff know the identity of the GST officer. More than half of the agencies do not have formal training plans in place for their GST staff. However, the level of training and the accessibility of GST information on various websites means that staff members should be adequately equipped to perform their GST functions. BACKGROUND In 2001 we looked specifically at how agencies account for GST and the controls used to manage the associated risks. We also reviewed how well they prepared their monthly BAS. That review highlighted individual issues in a number of agencies. However, there were two issues that were occurring in a number of the agencies. Agencies were not making use of their internal audit resources to review all aspects of GST on a cyclical basis and others needed to introduce systems or procedures to highlight uncommon events or transactions that may impact their GST position. It is understood that the ATO initially treated public sector agencies as low risk. Recent ATO audits at some agencies suggest that this initial assessment may have been changed. In light of the heightened interest shown by the ATO in public sector agencies, we decided to again look at GST. In this latest review we looked at the controls and processes used by agencies in accounting for GST and compared them to ‘best practice’. The agencies included in the review were: Crown Solicitor’s Office Landcom Delta Electricity Macquarie Generation Department of Education and Training NSW Fire Brigades Department of Energy, Utilities and Sustainability NSW Police Department of Health State Forests Energy Australia State Transit Authority Eraring EnergySydney Catchment Authority Independent Commission Against Corruption SydneyWater Corporation Integral Energy Transgrid 10 Auditor-General’s Report to Parliament 2004 Volume Five