The focus of the alert is to highlight the tax risks posed by Australian-resident taxpayers failing to declare taxable foreign gains or income in their Australian income tax returns.
The ATO website has now been updated to include a page setting out the documentation required to satisfy the ATO that a gift is a ‘genuine gift’, and that a loan is a ‘genuine loan’, notwithstanding neither a gift nor a loan requires documenting.
The alert is principally concerned with situations where taxpayers are aware of their residency status, as well as the tax implications that flow from it, but attempt to avoid or evade tax on their foreign assessable income and then disguise the character of funds upon their repatriation to Australia as a gift, or a loan, from a related overseas entity.
The ATO is currently undertaking reviews and audits on this category of tax evader, based on extensive data now available to it from a variety of sources - information exchanges afforded through double tax agreements, AUSTRAC data on movements of funds, and data extracted under the Common Reporting Standard and the Foreign Account Tax Compliance Act (which is US legislation).
Following the previous Panama Papers and Paradise Papers investigations (and the now newly released Pandora Papers), as well as Australia’s implementation of the Common Reporting Standard in 2019, it is clear that the ATO is still focusing on taxpayers who have failed to include foreign income in their Australian tax returns. If detected by the ATO, such a taxpayer should expect that the ATO will:
- assess the taxpayer on the basis that all of the amounts are to be taxed as assessable income if the ATO believes that the taxpayer has avoided or evaded their tax obligations
- impose significant penalties that could equal 90 per cent of the tax liabilities discovered and assessed, and
- investigate their affairs further for the purpose of commencing a criminal prosecution or refer the matter to other government agencies for such purposes.
The risks of concealing offshore income and assets are simply not worth it.
In our experience, where a voluntary disclosure is made, the ATO may, depending on the facts and circumstances, take a view that there has been no fraud or evasion and assess taxpayers only on income derived during a limited period.
In any case, a voluntary disclosure before the ATO tells you about an audit or examination of your affairs, irrespective of the circumstances, will result in the remission of penalties by 80 per cent. The ATO is also less likely to investigate a voluntary disclosure with a view to commencing a criminal prosecution than if the ATO had itself discovered the conduct.
The ATO will consider each voluntary disclosure on a case-by-case basis and the treatment will depend on the facts and circumstances of the particular taxpayer. The ATO has established a review panel to ensure like cases are treated consistently.
Voluntary disclosures must be handled with care and sensitivity.
Loans and gifts
Under the new website guidance, the ATO will adopt a forensic review of whether a gift or loan is ‘genuine’. The alert notes that:
- for a ‘genuine gift’ the level of documentation would depend on the size of the gift and the nature of the relationship between the parties, though a contemporaneous Deed of Gift, along with evidence of the gift-giver’s capacity to make the gift, would be required for ‘larger’ gifts or in circumstances of ‘atypical relationships’, and
- for a ‘genuine loan’ the ATO expects there to be a ‘properly documented’ loan agreement, and that principal and interest would be periodically repaid in cash over time (i.e. not be accumulated).
The legal necessity of the documentation expected by the ATO (and the requirement for ongoing interest and principal to be repaid in cash) is debatable, and we hope that the ATO will keep in mind the distinction between prudent record keeping and the requirements of the law.
However, taxpayers need to be aware that the ATO is often content to throw upon taxpayers the burden of proving (to the ATO’s satisfaction) that an amount transferred is a ‘genuine gift’ or a ‘genuine loan’, failing which the amount is simply treated as ordinary income.
The difficulty for taxpayers in displacing the onus of proof in these matters, and even the difficulty in accessing whatever documentation does exist should not be underestimated and proper advice should be obtained. This is especially the case where the relevant transactions stretch back years or decades.
We understand how the ATO is approaching such voluntary disclosures. Our team is experienced in preparing tax calculations in a manner the ATO understands and accepts and can assist in assessing how the ATO is likely to view each taxpayer’s individual circumstances. Our market leading controversy and advisory practice, together with our extensive history of dealing with the ATO, places us in an excellent position to advise regarding the making of voluntary disclosures of offshore income.
If you have any questions about the information in this article, please contact our team below.