Victorian auditor questions tens of millions of dollars in COVID-19 small business grants

Tens of millions of dollars in emergency COVID-19 grants were paid to Victorian small businesses in error, including $18.3 million towards businesses the state government considered a heightened fraud risk, according to a scathing assessment from the Victorian Auditor-General’s Office.

Its investigation of the Business Costs Assistance Program (BCAP), and a new audit from the Department of Jobs, Skills, Industry and Regions, suggests businesses genuinely entitled to those support payments will come under scrutiny in the hunt for fraudulent recipients.

The Victorian Auditor-General’s Office (VAGO) released its annual report on Victoria’s finances on Friday, including a review of BCAP and its extension programs.

BCAP provided $4.5 billion to small businesses whose trade was affected by COVID-19 lockdowns between July 2020 and June 2022, far more than any other business support package offered by the Victorian government.

It initially offered businesses one-off payments of $2,000, but grew through Victoria’s on-again, off-again lockdowns, with its final iteration offering up to $8,400 per week.

BCAP proved vital for many Victorian businesses thrown into disarray by the lockdowns, but the VAGO report raises concerns about the scheme’s administration — and whether every recipient was entitled to emergency funding.

VAGO’s investigation “identified serious deficiencies in their administration and in the controls over fraud and error,” the report said.

“It remains likely that undetected fraud occurred and errors were made in payments to some applicants.”

GST eligibility a crucial factor

While eligibility criteria for BCAP and its extensions changed over the scheme’s lifespan, common criteria included:

• Whether a business could prove a financial loss as a result of the lockdowns, through lost trade, bookings, or ongoing rent and salary obligations,
• Registration for GST when the program opened, and when their application was assessed,
• Holding an ABN.

The Department of Jobs, Skills, Industry and Regions’ predecessor viewed GST registration as a simple way to filter out applicants that were too small.

Businesses must register for GST when their annual turnover exceeds $75,000, meaning BCAP recipients were unlikely to be sole traders or micro-businesses better suited to separate financial support.

The department also viewed GST registration as a “critical integrity measure because it was intended to demonstrate that a business was actively trading prior to program launch,” VAGO added.

However, businesses can opt into GST registration even if their turnover is below $75,000.

Crucially, GST registration can be backdated by up to four years, providing retrospective coverage under the system.

Millions of dollars in payments made in error: VAGO

The VAGO report makes clear that BCAP applicants fell into four broad categories.

The first were small businesses that were registered for GST at the time of their application and remained registered when they were assessed.

These businesses had their claims approved.

The second group was not registered for GST at the time of their application, nor were they registered by the time of their assessment.

They were denied in the first instance.

“The application of this hard fail test to these applicants was appropriate,” VAGO said, “given the stated criterion and also given that these applicants had attested when they applied that they were registered, when patently they were not”.

The third group covers businesses that were not registered for GST at the time of application but were registered by the time of their assessment, including those who backdated their GST coverage.

This cohort also had their claims approved.

In total, $355.7 million was paid to businesses in this group.

Using GST registration data, VAGO found applications for GST spiked when the second BCAP round, and the second BCAP extension, opened for applications.

The grants flowing to small businesses that had recently backdated their GST coverage “were neither errors nor fraud”, according to the department.

“Part of [the department’s] rationale was that the guidelines were imprecise, because it had not specifically contemplated backdating at the time they were drawn up,” VAGO said.

(Further complications exist in relation to GST eligibility, with some business owners claiming to have received mixed messages from Business Victoria over their applications. In 2022, the department pledged to re-assess some applications it initially denied because applicants had backdated their GST coverage.)

The Victorian Auditor-General’s Office shared a wildly different opinion.

“The department’s views notwithstanding, all these grant payments had a higher risk of fraud,” its report said.

“Specifically, the risk is that businesses had registered solely to obtain grants and were not actively trading or a substantial business enterprise during the lockdown events, so suffered no loss and incurred no direct costs.”

Follow-up investigations from VAGO found $162.4 million in grant funding was paid to recipients that reported no business activity for the 2021–22 financial year, and $30.4 million of grant funding was paid to businesses that cancelled their GST registration before June 30, 2022.

SmartCompany does not suggest businesses that backdated their GST application to become eligible for BCAP funding engaged in fraudulent activity, merely that the VAGO report suggests a higher fraud risk among this cohort.

The fourth cohort represents what VAGO calls a clear error on behalf of the department.

Businesses in this group registered for GST after the eligibility date, but before their application was assessed — and did not successfully backdate their GST registration.

Despite their GST coverage not being backdated, businesses in this cohort received $55.8 million in grant funding.

“These businesses were demonstrably not registered before the specified dates nor with retrospective effect from the specified dates and should not have been paid,” VAGO said.

Payments despite backdated ABNs

The VAGO report also highlights a sub-set of the third cohort, which not only backdated their GST coverage but their ABN itself.

“The department treated payments to businesses that backdated their ABNs as more likely to be as fraudulent,” the report said.

“Where they found businesses that had backdated both their ABN and GST registrations they cancelled their applications.”

However, a November 2021 analysis of tax data by the department’s Integrity Services Unit “identified that $18.3 million had been paid to businesses that had backdated their ABN”.

The department viewed some of those payments as an “intentional decision out of administrative necessity, mainly for efficiency,” the report said.

But VAGO maintained that approach was “inconsistent with the published guidelines”, and that the department did not try reshaping the eligibility criteria to fit its approach.

Further, “no subsequent post-payment investigation of these businesses” was undertaken after the department formed its view, VAGO said.

The department has now written off that $18.3 million in erroneous grant funding as “doubtful” for repayment and has not taken action to recoup those funds.

New audit ongoing

However, VAGO reports a departmental audit commenced in October this year, suggesting scrutiny over the multi-billion dollar BCAP scheme is far from over.

That audit process will investigate whether businesses that backdated their ABN and or GST registration were eligible.

“The audit will also gather evidence on how grant funds were used,” VAGO said.

This suggests Victorian businesses which thought they were following the rules could come under the microscope, years after those funds were paid to the businesses, and spent in the course of the COVID-19 recovery.

You can read the VAGO report here.