ATO SETS ITS SIGHTS ON UNDISCLOSED FOREIGN INCOME

Do your clients have any amounts of offshore income they haven’t declared to the ATO – perhaps interest from a foreign bank account? Even if it seems like a small amount, it must be declared. International data-sharing arrangements are making taxpayers’ overseas financial affairs increasingly transparent, so don’t let your clients get caught out.

The ATO is reminding taxpayers about their obligation to report foreign income, and it’s keen to emphasise that its techniques for detecting offshore amounts are becoming increasingly effective. Cross-border cooperation between different tax jurisdictions means Australians’ financial information is being shared more than ever before – increasing the odds of your clients’ affairs being uncovered by the ATO.

Failing to report foreign income can attract penalties and ATO scrutiny of a taxpayer’s broader tax affairs.

How is foreign income taxed?

If your client is an Australian resident for tax purposes, they’re taxed on their worldwide income. This means they must declare all foreign income sources in their return. You should ask them to consider whether they’ve earned any amounts from:

•       investments held overseas, such as dividends, rental income from properties and interest from bank deposits;

•       overseas pensions;

•       overseas employment, including salary and directors’ fees; and

•       the sale of offshore assets (ie capital gains).

Remember, if someone has already paid tax on this kind of income overseas, they still need to declare it to the ATO. They may be able to claim an offset (subject to a certain limit if the claim exceeds $1,000) for the tax already paid in order to prevent double taxation.

All foreign income figures must be converted to Australian dollars according to particular exchange rate rules, and amounts that were earned in countries that don’t have an income year ending 30 June may need to be apportioned.

Is your client a “resident”?

Your clients will only be subject to Australian tax on their foreign income if they are an Australian resident for tax purposes. If they are a non-resident, they will generally only pay tax on their Australian-sourced income.

Being an Australian resident for tax purposes is different to immigration concepts of residency, and nationality is generally not relevant. So even if your client isn’t an Australian citizen or permanent resident, they could be a resident for tax purposes.

The main test for tax residency is whether someone “resides” in Australia. There’s no single factor that determines whether this test is met. Instead, it requires a weighing up of all relevant circumstances, including things like the the person’s intentions, their family and living arrangements, business and employment ties, and so on.

However, even if someone doesn’t currently “reside” in Australia for tax purposes, they may still be a resident for tax purposes under several alternative tests (including where both their “domicile” and permanent place of abode are maintained in Australia).

Making a voluntary disclosure

If your client thinks they may have omitted some foreign income from a previous tax return, you can help them to make a voluntary disclosure to the ATO and arrange for them to pay any tax owed. Voluntary disclosures will often result in a reduction of the ATO penalties and interest that would otherwise apply – and the outcome is generally much more favourable if the disclosure is made before the ATO commences an audit of thee taxpayer’s affairs. Given the ATO’s increased powers to detect offshore amounts, taxpayers with unreported income should think seriously about the benefits of proactive disclosure.

If you would like to know more please contact one of our accountants on 07 4639 1099 or come in and see us at 14 Russell Street Toowoomba.