Recently, the Australian Taxation Office (ATO) issued Taxpayer Alert TA 2021/2. This alert addresses Australian taxpayers who are trying to avoid paying taxes on their foreign assessable income. Instead of being honest about this income, some Australian taxpayers are trying to disguise funds they received from overseas as a gift or a loan from a related overseas entity.
The ATO is also concerned about certain Australian taxpayers who are using such loans to claim deductions for interest that was never incurred.
Penalties Associated with Concealing Foreign Income
This most recent Taxpayer Alert is warning taxpayers and advisors who are making arrangements to conceal their overseas income that they could receive significant penalties. These penalties include up to 90%, plus shortfall interest. Taxpayers and advisors who attempt to mislead the ATO could also face the risk of criminal prosecution and penalties under criminal law.
The ATO is currently investigating illegal mechanisms for shielding foreign income. It is also actively engaging with taxpayers who have entered such arrangements to ensure that they pay the correct amount of tax. Additionally, the ATO is advising anyone who has omitted income from their tax return to come clean by filing an amendment or making a voluntary disclosure.
Types of Foreign Income
Foreign income that the ATO is concerned taxpayers are trying to conceal include:
• overseas employment or business income
• interest from foreign financial institutions or loans
• dividends from foreign companies
• capital gains on disposals of foreign assets (such as shares in a foreign company)
• deemed amounts of foreign income in relation to interests in foreign companies or trusts
Key Takeaways of Taxpayer Alert TA 2021/2
There are a few important points from the most recent Taxpayer Alert to highlight:
• Take the alert seriously. The ATO isn’t just voicing their concerns, but they are also highlighting their ability to cross-reference any statements your client provides regarding overseas income. This includes financial records and information on overseas entities. Therefore, it is vital that your clients be as accurate as possible when reporting their overseas income. If not, the ATO has the resources and capabilities to verify that information. If the information your clients provide does not match up with what the ATO finds, your client may be at risk of facing penalties such as sanctions under criminal law.
• The ATO is looking to make sense of unexplained wealth. If there’s a discrepancy between the amount of income and profits your client reports on their tax return and their lifestyle, the ATO will likely initiate a more comprehensive review. This might mean looking into any funds your client may have received from overseas.
• The ATO will take a holistic approach in reviewing a loan or gift agreement. This might include checking if the gift or loan arrangement is genuine or commercial. Another issue might be to check if the terms of the loan or gift are properly recorded.
• The ATO is looking into the possibility of requiring certain information from overseas parties. This type of information might include bank statements, photo ID, and/or passports. If someone from overseas is, in fact, providing a genuine gift or personal loan, then they are likely to provide information to prove it.
In conclusion, taxpayers who have not received any foreign income and have, in fact, received a genuine gift or loan from a party overseas should not be concerned. On the other hand, taxpayers who deliberately omit foreign income, conceal their interests in foreign assets, or make false claims for deductions in their tax returns should be concerned. They could face significant penalties.
To avoid such penalties, Australian taxpayers should be honest in their tax returns and not attempt to mislead the ATO about income earned from overseas.