Compliance with GST regulations a key concern in real estate and construction

The Australian Taxation Office (ATO) has recently issued a stern warning to businesses in the real estate and construction sectors about the rising trend of GST fraud.

Sophisticated schemes are being used to exploit GST rules, and the ATO is actively working to combat these fraudulent activities. Understanding these schemes is crucial for businesses to stay compliant and avoid severe penalties.

Key highlights

• Fraudulent schemes involve complex arrangements between related parties to obscure transactions.
• Common tactics include inflating invoices or issuing invoices for non-existent goods or services.
• The ATO has increased their efforts to combat GST fraud, resulting in significant penalties for those caught.
• The real estate and construction sector is just one of many industries where the ATO have noticed an uptick in fraudulent behaviour. 

Understanding GST fraud schemes

Sophisticated structuring

 Fraudulent schemes often involve intricate arrangements between related parties. These arrangements are designed to obscure the true nature of transactions, making it difficult for authorities to detect fraud. High-value transactions, such as property purchases, are commonly used to generate significant GST refunds.

False invoicing

One of the most prevalent tactics is false invoicing. This involves inflating invoices or issuing invoices for goods or services that were never provided. Such practices not only distort financial records but also lead to substantial, unjustified GST refunds.

The role of misaligned GST accounting methods

Creating artificial refunds

 Fraudsters often exploit differences in GST accounting methods within a group of related entities. By having one entity operate on a non-cash basis while another uses a cash basis, they can create mismatched timing of transactions, resulting in artificial GST refunds.

Duplicated GST claims 

Another common scheme is duplicating GST credit claims across related entities for a single high-value transaction. This tactic further inflates the amount of GST refunds claimed, defrauding the tax system.

Combating GST fraud

ATO's vigilance and actions 

The ATO, through the Serious Financial Crime Taskforce (SFCT), is actively targeting these fraudulent behaviours. Equipped with advanced data matching, analytics capabilities, and intelligence-sharing relationships, the SFCT is uncovering even the most elaborate financial crimes. Businesses found engaging in these schemes face severe penalties, including criminal investigations and promoter penalty actions against advisers encouraging such practices.

Operation Protego is one significant initiative led by the ATO to tackle GST fraud. This operation focuses on fraudulent schemes promoted through social media, where individuals create fake businesses and lodge fictitious business activity statements (BAS) to claim false GST refunds.

The ATO has allocated resources to this operation, utilising sophisticated risk models and collaborating with banks and law enforcement agencies to detect and combat these fraudulent activities. More information can be found here.

Key rules for legitimate GST credit claims 

When can input tax credits be claimed?

Businesses are entitled to claim input tax credits (ITCs) for any GST included in the price of their creditable acquisition if the following requirements are met:

• The entity is registered or required to be registered for GST
• The entity acquires something solely or partly for a creditable purpose
• The supply of the thing to the entity isa taxable supply
• The entity provided (or is liable to provide) consideration for the supply.

What is a creditable purpose?

An acquisition is made for a creditable purpose to the extent that it is acquired in carrying on their enterprise. However, an acquisition is not made for a creditable purpose to the extent that it relates to making input-taxed supplies or is private or domestic in nature.

Special rule for margin scheme and purchase of land

A special rule applies so that an ITC cannot be claimed in relation to the acquisition of land where the GST included in the purchase price was calculated using the margin scheme.

Warning signs of potential fraud

Lack of adequate and contemporaneous records to substantiate your ITC claims. This relates to supporting records to corroborate the claim.

Misclassifying transactions, such as treating taxable supplies as input taxed or GST-free without proper justification.

Making claims for ITCs that are inconsistent with the nature of the business or lack of proper documentation can also indicate fraudulent activity.

How can real estate and construction businesses stay compliant with GST regulations?

Businesses are urged to avoid participating in these fraudulent schemes. If involved, they should make a voluntary disclosure to the ATO to potentially reduce penalties.

Businesses must stay informed about the latest developments in GST regulations and ensure their practices are compliant. RSM provides expert advice and support to help businesses navigate these complexities and avoid the pitfalls of GST fraud.

FOR MORE INFORMATION

 For more information and assistance, get in touch with your local RSM adviser.