Input Tax Credit estimators

Understand the risks and governance required when using an Input Tax Credit (ITC) estimator for calculating GST credits.

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What is an Input Tax Credit estimator

An ITC estimator is our general term for any methodology used to estimate GST credits for unprocessed tax invoices (tax invoices you hold that haven’t been processed in your accounting system at the end of a tax period – or in time for your business activity statement (BAS) lodgment).

There are various ITC estimator methodologies. They all rely on data to calculate an estimate, average, or percentage of GST credits for the unprocessed tax invoices of a business for a tax period.

ITC estimators are generally used by large organisations that have the necessary governance, processes, and systems in place to ensure that the ITC estimator is used and reviewed appropriately.

Risks associated with using an ITC estimator

We strongly encourage you to assess all of the risks associated with the use of ITC estimators.

An ITC estimator raises the complexity of your accounting arrangements and increases the risk that you’ll over-claim your GST credits. As a result, you’re more likely to be reviewed by us.

Your compliance costs may increase if you use an ITC estimator. This is because in addition to undertaking regular reviews of your ITC estimator methodology, you may need to make revisions to your BAS for tax periods where you have over-claimed your GST credits.

An ITC estimator will adversely impact your business’ risk profile with us if you don’t have appropriate controls and strong governance in place.

If you use an ITC estimator, you may be subject to penalties and general interest charge (GIC).

Penalties and GIC

You may be subject to penalties and GIC if we undertake a review and it’s identified you:

have made a false or misleading statement
aren’t able to demonstrate that you hold valid tax invoices for the GST credits claimed in your BAS.

Where you and/or your agent fail to take reasonable care in preparing and lodging your BAS, and this results in a false or misleading statement – we’ll review the behaviour of you and your agent leading up to the lodgment of that BAS to determine penalties.

When considering your behaviour for penalty purposes, we’ll apply an objective test to determine whether your ITC estimator produces an accurate estimate of your GST credit entitlement for unprocessed tax invoices.

If on an objective assessment, your ITC estimator is likely to, or does produce an inaccurate estimate – this would be a strong sign that your behaviour in the preparation of your BAS, demonstrates a lack of reasonable care, recklessness or intentional disregard of the law.

A failure to implement appropriate governance and internal controls, to conduct regular reviews of your estimate, or to take steps to minimise GST credit over-claims, would be a strong sign that your behaviour demonstrates a lack of reasonable care, recklessness or intentional disregard of the law in the preparation of your BAS.

For more information on penalties and interest, see:

Using an ITC estimator – key actions

Ensure that the ITC estimator is appropriate for your business, including making allowances for business fluctuations, so you do not overclaim your GST credits in any tax periods.

Update your governance process and documentation to ensure appropriate use and reviews.

Regularly review the accuracy of your ITC estimator methodology. It isn’t appropriate to use a ‘set and forget’ approach.

As part of this regular review, reconcile the estimated GST credit claim against your actual entitlement to GST credits for each tax period that you have used an ITC estimator.

You should implement appropriate systems, controls and robust governance. Ensuring the calculation and use of the ITC estimator complies with any relevant accounting standards.

Reviewing your ITC estimator

We expect you to review your ITC estimator (at a minimum):

every 6 months
at any time where there is a material event or change to the business (significant expenditures, seasonal variations, business system changes or business re-structuring).

In your review, you should:

assess the appropriateness of your ITC estimate going forward
reconcile your estimated GST credit claims against your actual GST credit entitlements for each of the tax periods since your last review.

Assessing your ITC estimate going forward

When assessing the appropriateness of your ITC estimate going forward, you should (where relevant):

Consider your future business outlook including financial forecasts, major contracts and other economic conditions. It isn’t enough to just rely on past data.
Ensure significant expenditure and seasonal variations are taken into account. For example – if the expenditure varies significantly due to seasonal trends, you should take a conservative approach in order to reduce the risk of over-claiming GST credits. Your ITC estimate calculation should be based on the month with the lowest delayed GST credits, rather than using an average. Alternatively, you may vary the estimate at relevant tax periods to reflect the seasonal variations – including year-end processing.
Make adjustments for material changes in business operations. For example – the expenditure patterns of a mining business may shift as the mine moves from the development phase to its commissioning and operation. We would expect the methodology to be adjusted to take into account changing patterns and types of expenditure at each phase. Although expenditure may increase in some phases, that expenditure may be on acquisitions that aren’t subject to GST.
Ensure the methodology takes account of any material downturns in business activity.
Ensure you have robust governance and controls in place to monitor the appropriateness of your estimate, minimising the chance of an over-claim.

This isn’t an exhaustive list. You may need to consider other factors when assessing the appropriateness of your estimate, to avoid over-claiming your GST credits.

Find out more above good tax governance in our tax risk management and governance review guide.

Reconciling your estimates of GST credits

For each tax period under review, you must compare your total GST credit entitlement to the amount of GST credits that you claimed using your ITC estimator. This will show that you have either claimed more or less GST credits than your actual entitlement and will determine what corrective action (if any) needs to be taken on your BAS for that particular tax period.

When conducting your reconciliation of multiple tax periods, it isn’t appropriate to compare the total over-claims against under-claims to arrive at a net adjustment figure. Each tax period is discreet and must be reconciled separately.

What corrective action do you need to take?

Under-claims

In most cases where you have under-claimed your GST credits in a tax period, you won’t need to take any corrective action on any BAS. This is because the GST credits will have been processed and taken into account in the BAS for following tax periods. Once the GST credits have been taken into account (in later tax periods) it isn’t possible to take them into account in an earlier tax period.

The exception to this is where you haven’t lodged a subsequent BAS when you became aware of an under-claim. In this case you may amend the original BAS.

Over-claims

In most cases where you have over-claimed your GST credits, you must amend your original BAS to reduce the net amount by the over-claim.

The exception to this is where you meet the conditions in GSTE 2013/1 Goods and Services Tax: Correcting GST Errors Determination 2013 (the Determination).

Correcting GST errors

If the error satisfies the conditions in the Determination you may be able to make a correction to your current BAS.

The Determination explains that there are 2 types of GST errors you can make – a credit error and a debit error.

Credit errors

You make a credit error if you make a GST error in working out your net amount for a reporting period that would have – if it was the only mistake in the reporting period – resulted in you reporting or paying too much GST. Claiming a GST credit on a later BAS because you failed to claim it in an earlier BAS is not a credit error.

An under-claim as a result of using an ITC estimator is not a credit error for the purposes of the Determination. This is because under-claims are automatically claimed (taken into account) in following BAS once the relevant tax invoices are processed.

Debit errors

You make a debit error if you make a GST error in working out your net amount for a reporting period that would have – if it was the only mistake in the reporting period – resulted in you reporting or paying too little GST.

An over-claim as a result of using an ITC estimator is a debit error for the purposes of the Determination. You may be able to correct this error in a following BAS if you meet the requirements of the Determination.

Amongst other things, the Determination requires that a debit error comes within time and value limits. The net sum of debit errors is one or more debit errors less any credit errors you choose to include or correct in a following BAS. As explained, under-claims of GST credits as a result of using the ITC estimator are not credit errors and can’t be used to offset your debit errors.

If a debit error or net sum of debit errors is below your value limit, you can correct the errors in a following BAS. If a debit error or net sum of debit errors exceeds your value limit, you can still correct the errors up to the value limit in a following BAS. The balance (excess over the value limit) of the errors will need to be corrected in the original BAS (see worked example for practical application).

You can’t use the Determination to correct a debit error in some situations, including where the error is a result of recklessness or intentional disregard of a GST law.

Worked example

Zebra Pty Ltd (Zebra) lodges monthly BAS and has a GST turnover of $500 million. Zebra commences using an ITC estimator in July 2020.

Zebra estimates that the GST credits for its unprocessed tax invoices are $1.5 million per month. It claims this additional amount (the ITC estimate) in its July 2020 BAS. The ITC estimate balance is $1.5 million.

In February 2021, Zebra undertakes a review of its ITC estimator to assess the appropriateness of its $1.5 million estimate going forward. As part of this review, Zebra also reconciles its estimated GST credit claims against its actual GST credit entitlements for the tax periods from 1 July 2020 until 31 December 2020.

Where Zebra identifies that it has an over-claim that it cannot correct in a later tax period using the Determination – it must make a revision to the original BAS for that tax period. When this occurs, they must also reduce their ITC estimate balance by that amount for following tax periods.

In later tax periods, Zebra will compare this (or any following) reduced ITC estimate balance to their actual GST credit entitlement for the relevant tax period. This is to determine the amount of any over-claim or under-claim.

The table below illustrates over-claims and under-claims identified by Zebra as part of the reconciliation. It explains what corrections or revisions Zebra can make, and any impacts on the balance of the ITC estimate.

Tax period	Over claim (debit error) ($)	Under claim (not a credit error) ($)	Correction/ revision	Reason	ITC estimate balance for calculating subsequent tax period over/under-estimates ($)
Jul-20		100,000	No correction or revision needed.	Will be claimed in subsequent AS when invoices are processed.	1,500,000
Aug-20	50,000		Zebra chooses to correct this $50,000 debit error in Feb 17 AS.	On review in Feb 17, the net sum of the debit errors in the period Jul 16 to Dec 16 is $200,000. Zebra’s debit error value limit is $80,000.There are no credit errors to offset. Zebra can correct up to $80,000 of its total net debit errors for Jul 16 to Dec 16 in Feb 17. Zebra corrects the $50,000 debit error for Aug 16 in the Feb 17 AS.	1,500,000 ITC estimate balance remains the same as Zebra chooses to correct $50,000 debit error in the Feb 17 AS. No change is made to the Aug 16 AS.
Sep-20	50,000		Zebra chooses to correct $30,000 of this $50,000 debit error in Feb17 AS. Sep 16 AS must be revised for the remaining $20,000.	The debit error value limit of $80,000 is now exceeded by the $50,000 error in Augand $30,000 error in Sept 16 AS. The remaining $20,000 debit error must be revised in the original Sep 16 AS. If applicable, GIC and penalties are assessed from the due date for lodgment of the Sep 16 AS.	1,480,000 ITC estimate balance is reduced by $20,000 because original Sep 16 AS was amended by this amount.
Oct-20		150,000	No correction or revision needed.	Will be claimed in subsequent AS when invoices are processed.	1,480,000
Nov-20		100,000	No correction or revision needed.	Will be claimed in subsequent AS when invoices are processed.	1,480,000
Dec-20	100,000		Zebra must correct this error by revising the Dec 16 AS.	The debit error value limit of $80,000 was exceeded by errors in Aug and Sept 16 AS. The Dec 16 AS must be revised to correct the debit error of $100,000. Zebra cannot correct any of this debit error in the Feb 17 AS. If applicable, GIC and penalties are assessed from the due date for lodgment of the Dec 16 AS.	1,380,000 ITC estimate balance is reduced by $100,000 because original Dec 16 AS was amended by this amount.

After making the revisions outlined in table above, the balance of Zebra’s ITC estimate at the end of December 2020 is $1.38 million (the original $1.5 million estimate reduced by the revisions of $20,000 in September 2020 AS and $100,000 in December 2020 AS).

For the tax periods commencing 1 January 2021, the ITC estimate of $1.38 million will be used for reconciliations.

Zebra is required to reduce label 1B by $80,000 in the February 2021 BAS. This is because they chose to rely on the Determination to correct debit errors of $50,000 and $30,000 from the August and September 2020 tax periods respectively.

Determining the appropriate ITC estimate for the next 6 months

As part of its 6 monthly review, Zebra assesses the appropriateness of its ITC estimate for the next 6 months.

Scenario 1: Decrease in estimate

Zebra reviews their ITC estimator methodology taking into account their future forecasts, and determines that the appropriate ITC estimate for the next 6 months from February 2021 is $1.2 million.

Zebra already has an $80,000 correction to be made by reducing label 1B in the February 2021 BAS. Therefore, to change the ITC estimate from $1.38 million to $1.2 million, they will decrease label 1B in the February 2021 BAS by a total of $180,000 ($100,000 decrease for the estimator forecast and an $80,000 decrease for the debit error correction for the August and September 2020 tax periods).

Scenario 2: Increase in estimate

Zebra reviews their ITC estimator methodology taking into account their future forecasts. They determine that the appropriate ITC estimate for the next 6 months from February 2021 is $1.7 million.

Zebra already has an $80,000 correction to be made by reducing label 1B in the February 2021 BAS. Therefore, to change the estimate from $1.38 million to $1.7 million, they will increase label 1B in the February 2021 BAS by a total of $320,000. The decrease of $80,000 at label 1B (to correct the errors from the August 2020 and September 2020 tax periods) is no longer needed, because the correction is negated by the revised estimate.

Source: gov.au

Deduction (input tax credit)