If you have any undisclosed income, the tax office is offering a chance to get in early to reduce penalties. By TERRY HAYES of Thomson Legal & Regulatory.
By Terry Hayes
Australian resident individuals and businesses are generally subject to tax on all their income, whether sourced in Australia or elsewhere. Businesses may be tempted to think that offshore income, as far as the tax office is concerned, is “out of sight and out of mind”. Not so.
Tax commissioner Michael D’Ascenzo recently announced an initiative to encourage taxpayers to come forward and make disclosures of unreported income from offshore activities.
This represents an opportunity for taxpayers to review their returns and to disclose unreported income – before the taxman knocks on their door.
The commissioner said that while there is nothing wrong with holding an offshore account or investing overseas as long as any relevant Australian tax is paid, the tax office is increasing its audit activities in cases where people or businesses try to conceal income and assets offshore in tax havens.
This includes undisclosed offshore income (including capital gains) or over-claimed deductions involving international transactions. Those international transactions may include arrangements using offshore entities such as partnerships, foundations, trusts and companies.
As an incentive to capture this income, D’Ascenzo says that taxpayers who contact the tax office before they are the subject of an audit, and make a full and true disclosure, will have reduced tax shortfall penalties.
If there has been an omission of income, the tax office says that primary tax and interest will be payable. However, taxpayers can request a further reduction of any penalties or interest charged, or additional time to pay based on their personal circumstances. They will need to provide in writing full details of the circumstances to the tax office.
The reduction in penalties can be significant. For example, if an offshore voluntary disclosure is made and the taxpayer’s additional taxable income is $20,000 or less in a year, the tax office says the taxpayer will not have to pay a shortfall penalty for that year.
If the additional taxable income exceeds $20,000, the taxpayer will be entitled to a reduced shortfall penalty of 5% of their additional liability.
At the same time, the tax office is conducting a pilot project with some Australian financial institutions, where it has asked their overseas subsidiaries or branches in Vanuatu to write to their Australian customers and encourage them to make a voluntary disclosure of any unreported income.
Other approaches adopted by the tax office include sending a letter to people identified as having an offshore debit or credit card in the tax havens of Jersey, Guernsey or the Isle of Man or identified through Australian Transaction Reports and Analysis Centre (AUSTRAC) data as having dealings with those tax havens.
Limitations on the taxman’s offer
There are limitations on the tax office offer. It is important to be aware that the offshore voluntary disclosure initiative and related reduced shortfall penalty is not available to anyone who is:
- Already under review, including as part of Project Wickenby (the multi-government agency project on tax evasion).
- Engaged in activities that exhibit a significant degree of criminality, or have been engaged in such activities.
- A promoter of a tax exploitation scheme.
- A registered tax agent or who receives a fee for providing tax advice.
In essence, the tax office says a taxpayer or business will not be eligible for the penalty concession if they:
- Have received an intention to audit letter from the tax office.
- Are currently under audit.
- Have received a notice requiring them to produce information relating to offshore income to the tax office or to a law enforcement agency.
- Have engaged in falsification of documents or transactions, or have falsified their ownership of assets, entities or structures.
- Have engaged in money laundering or other forms of criminality.
Making a disclosure
To take advantage of the commissioner’s offer, taxpayers must make a full and true disclosure of all matters material to assessing their taxation liability, including disclosing all tax liabilities. The voluntary disclosure must be made in writing by completing an Offshore Voluntary Disclosure Statement (ATO form NAT 71149). This form can be obtained by printing it off from the tax office website or by calling 1300 720 092.
The tax office will confirm receipt of the disclosure statement, and may also contact the taxpayer to follow up or clarify issues. The taxpayer will receive a ‘notice of amended assessment’ for each year amended, and the amended assessments should be paid by the due date. If a business has problems in meeting its tax payment obligations, they should contact the tax office on 13 28 61 to work out a payment plan.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.
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