In brief
The Australian Taxation Office (ATO) has issued detailed guidance to taxpayers on the recommended approach to self-reviewing their goods and services tax (GST) classification processes, controls and methodology, in relation to GST-free food and health products.
The guidance highlights the ATO’s significant focus on GST classification and the recognition that an environment involving high-volume, low-value transactions relating to the supply of food and health products carries a known risk of GST classification errors that may lead to significant under-reporting of GST.
Taxpayers who have already undertaken significant work to implement robust processes for GST classification may use the newly communicated ATO guidelines to validate and finetune their approach. Others will have a larger gap to bridge in light of the detailed guidelines.
In detail
The focus on GST classification has been gaining momentum through the GST justified trust program and risk reviews. Taxpayers are being faced with constant changes through new ATO guidance and determinations to implement into their GST processes and controls.
The guidance is targeted at food and health products and any products where the use of GST-free provisions under the GST Act is being considered. Recent changes to the GST treatment of food products have been previously reported in Tax Alert - Prepared meals and Tax Alert - GST Food updates. In addition, The ATO recently released the following draft GST Determinations on GST classification:
- Draft GSTD 2024/D2 to modernise and clarify the ATO’s views on when the supply of a sunscreen product is GST-free; and
- Draft GSTD 2024/D3 on GST classification of prepared meals, adding detailed guidance on the GST treatment of salads.
The processes and controls for GST classification should be adequate to ensure that businesses can meet their GST obligations and must be fit-for-purpose in the circumstances of each business. The ATO’s increasing expectations have been made clearer in the specific guidance issued in two forms:
- Self review guide - for medium to large businesses; and
- Checklist - for small to medium businesses (with a turnover of $2 million or less)
The documents provide a step-by-step guidance to entities on self-reviewing the GST classification of their supplies (such as products stocked, imported or produced) and assessing the robustness of their business systems, processes and controls in relation to GST classification.
Whilst the use of the guides is not mandatory, the ATO encourages entities to use them to regularly self-review GST classification, as well as relevant governing processes and controls.
Self-review guide - for medium to large businesses
The self-review guide is set out in two key parts:
1. The core elements of an appropriate GST product classification process.
This part sets out the better practice steps to embed into existing product onboarding and reviewing processes, to achieve well-designed and robust controls for GST determination, management of GST data and appropriate documentation. This is complemented by the Self-review checklist - better practice GST classification process (at Appendix A) which can be used to assess the robustness of controls in place for your product classification process.
2. A self-review methodology for GST classification of the product file.
Depending on the business, GST classification controls may be integrated as automated system-based controls and/or implemented as manual GST controls. The key steps of the methodology include:
- Detailed review of the full GST product file - where the use of analytical tools is recommended.
- Where uncertainty remains for GST classification of products, consideration of external advice and/or ATO engagement (e.g. via a private ruling).
- Documentation of the outcomes of the self-review, including corrective action(s) taken.
- Actioning corrections as a result of errors, which may include updating of the product file, identification of amendments to GST net amounts and/or voluntary disclosure.
- Prioritise the review of non-taxable products, recognising that taxpayers may wish to take a risk-based approach.
The outcomes of the self-review are intended to provide taxpayers with objective evidence to identify the extent of any GST product classification risk present in the business systems, and understand any gaps in their systems, relevant governance processes and controls. These will inform any corrective action required to address the identified gaps.
Checklist - for small to medium sized businesses
The Checklist sets out ATO’s recommended better practice processes to be implemented by small to medium businesses, focused on the overall GST classification process as well as new product onboarding. Whilst the fundamental elements of the GST processes align with the Self review guide, it is recognised that small to medium sized businesses’ resources are limited so the processes and controls set out in the Checklist are less detailed and the self-review is recommended to be completed annually.
The detailed better practice process for a self-review methodology of the product file is identical to the process recommended for medium to large businesses (as discussed above).
The takeaway
The ATO's guidance provides taxpayers a practical and detailed approach of the concrete steps they can adopt to improve their GST processes and controls on classification of food and health products. On the other hand, the release of this guidance places an increased responsibility and expectation on all taxpayers, large and small, to be familiar and comply with the new GST classification guidance.
The detailed nature of the proposed methodology also implies that significant resources will need to be committed by businesses dealing in food and health products to comply, through implementation of automated system-based controls and/or regular manual processes.
Our team is experienced to support in all parts of the GST classification process, in line with the ATO’s proposed approach.
Matthew Strauch
Andrew Howe
Mark Simpson
Shagun Thakur
Jeff Pfaff
Kati Pedersen
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