The Coalition government was urged at least three years ago to stop Australians claiming back GST through a scheme that gives tax refunds to tourists, a move that would have generated an extra $440 million in revenue for the states and territories.
An Australian National Audit Office review has found the Tourist Refund Scheme is being poorly run, with at least $240 million in fraudulent claims made over the past 20 years.
The scheme was introduced in 2000 to allow international tourists to apply for a refund of the Goods and Services Tax and Wine Equalisation Tax paid on goods worth at least $300 bought in Australia.
It was intended to boost tourism and retail sales to international travellers.
But unlike the 60 other countries that give tax refunds to tourists, Australian citizens and residents can also apply for their GST back on goods bought 60 days before they depart.
About 40 per cent of claims made under the scheme were by Australians, the audit found.
Australian travellers claimed $55 million of GST refunds last year.
The Australian Tax Office gives the Department of Home Affairs around $50 million a year to administer the scheme along with several other tax-related programs.
But since 2015, the department has said this funding was not keeping pace with the increasing workload.
Over the past five years, the number of claims had increased by 43 per cent but funding fell by 4 per cent, the department said.
Last year, there was a shortfall of $5.6 million, with a $1 million injection needed to clear a backlog of unprocessed claims.
However the tax office told the department in January there would be no extra funding provided.
Instead the tax office proposed holding a "joint workshop" to look at options to deal with the workload.
The audit said Home Affairs and the ATO considered the tax refund scheme a "low priority".
Despite this, both arms of government had repeatedly warned Treasury a high number of Australians were making fraudulent claims, according to documents provided to the audit office.
Estimates varied from between 36 per cent of claims to 82 per cent.
Based on this, the audit office estimated the amount of GST lost over the past 20 years range from $244.3 million to $556.6 million.
And while Home Affairs officials have the power to issue on-the-spot fines for people trying to smuggle goods back into the country after fraudulently claiming a GST refund, only 54 Australians had been pinged in the past year.
"Given the ATO and Home Affairs' estimates of non-compliance of between 36 per cent and 82 per cent, this suggests that GST penalties are relatively rarely used as a method to deal with non-compliance," the audit office said.
Treasury has also told the Treasurer there is no "strong policy rationale" for allowing Australians to access the scheme as far back as 2016, documents provided to the audit office showed.
It estimated excluding Australian citizens and residents from the scheme would provide an additional $440 million in GST revenue from 2018-19 to 2020-21.
States and territories were unanimously in favour of closing the loophole, when it was discussed at COAG in December 2016.
But Assistant Treasurer Michael Sukkar said the states had to initiate any action to reform the scheme.
"To date, no major reform options have received the unanimous support of the states and territories but the issue remains the subject of ongoing discussions," Mr Sukkar said.