ATO take 'gloves off' on overseas income

September 2019

The Australian Tax Office (ATO) has been steadily ramping up its focus on undisclosed foreign income but for those who haven't taken advantage of previous amnesties, the gloves are off.

In 2014, the Australian Taxation Office (ATO) offered a penalty amnesty on undisclosed foreign income. Five years on, the ATO has again flagged that underreporting of foreign income is an issue and this time the gloves are off.

Australians have always been global travellers when it comes to work, however it is important that tax be part of the planning process if they intend to spend significant chunks of time overseas.

And cross-border movement can make tax very complicated. For example, simply because a taxpayer works outside of Australia for a period of time doesn't mean that they are not a resident for tax purposes during that period. For those taxpayers with international investments, it's important to understand the tax status of earnings from such assets.

Likewise, just because the asset may be located overseas doesn't mean they are safe from Australian tax law, even if the cash stays outside Australia.

Taxpayers shouldn't assume that just because foreign income has already been taxed overseas or qualifies for an exemption overseas that it is not taxable in Australia.

So, what are the main traps for Australian taxpayers?

How are Australians taxed based on residency?

How Australians are taxed and what they are taxed on depends on residency status for tax purposes. As tax residency can be different to general residency status it's important to seek clarification from a specialist.

The residency tests don't necessarily work on 'common sense.' For tax purposes here are the main categories of resident:

  • Australian resident – Taxed on worldwide income including money earned overseas (such as employment income, directors fees, consulting fees, income from investments, rental income, and gains from the sale of assets).
  • Foreign resident – Taxed on their Australian sourced income and some capital gains. Unlike Australian resident taxpayers, non-resident taxpayers pay tax on every dollar of taxable income earned in Australia starting at 32.5% although lower rates can apply to some investment income like interest and dividends.
  • There is no tax-free threshold for foreign resident – Australian-sourced income might include Australian rental income and income for work performed in Australia.
  • Temporary resident – Generally, those who have come to work in Australia on a temporary visa and whose spouse is not a permanent resident or citizen of Australia. Temporary residents are taxed on Australian sourced income but not on foreign sourced income. In addition, gains from non-Australian property are excluded from capital gains tax.

How money is being tracked

A lot of Australians have international dealings in one form or another. The ATO's analysis shows China, the United Kingdom, Switzerland, Singapore and the United States are popular countries for Australians.

The ATO shares the data of foreign tax residents with over 65 foreign tax jurisdictions. This includes :

  • information on account holders
  • account balances, interest and dividend payments
  • proceeds from the sale of assets, and
  • other income.

There is also data obtained from information exchange agreements with foreign jurisdictions.

In addition, the Australian Transaction Reporting and Analysis Centre (AUSTRAC) provides data to the ATO (and the Department of Human Services) on flows of money to identify individuals that are not declaring income or paying their tax.

It's not uncommon for taxpayers to forget to declare income from a foreign investment like a rental property or a business because they have had it for a long time and deal with it in the local jurisdiction with income earned 'parked' in that country.  However, problems occur when the taxpayer wants to bring that income to Australia.

AUSTRAC, or the ATO's data matching, picks up on the transaction and then the taxpayer is contacted about the nature of the income.

If the income is identifiable as taxable income (for example, from a property sale or income from a business), the ATO is likely to look very closely at the details with an assessment and potentially penalties and interest charges following not long after. 

There is no point telling the ATO the money is a gift if it wasn't as they can generally find the source of the transaction and will know it's not from a very generous grandmother – and misdirection is only going to ensure that there is no leniency.

What you need to declare in your tax return

Australian residents need to declare all worldwide income in their tax return unless a specific exemption applies, although in some cases even exempt income needs to be reported.

Income is anything earned from:

  • Employment (including consulting fees)
  • Pensions, annuities and Government payments
  • Business, partnership or trust income
  • Crowdfunding
  • The sharing economy (AirBnB, Uber, AirTasker etc.,)
  •  Foreign income (pensions and annuities, business income, employment income and consulting fees, assets and investment income including offshore bank accounts, and capital gains on overseas assets)
  • Some prizes and awards (including any gains you made if you won a prize and then sold it for a gain), and
  • Some insurance or workers compensation payments (generally for loss of income).

Prizes such as lotto or game show prizes, or ad-hoc gifts don't need to be declared.

Declaring gifts from overseas

A gift of money is generally not taxable but there are limits to what is considered a gift and what is income.

If the 'gift' is from an entity (such as a distribution from a company or trust), if it is regular and supports a lifestyle, or is in exchange for your services, then the ATO may not consider this money to be a genuine gift.

Declaring overseas assets

There are only two choices here: do nothing (and be prepared to face the full weight of the law) or work with the ATO to make a voluntary disclosure.

Disclosing undeclared assets and income will often significantly reduce penalties and interest charges, particularly where the oversight is a genuine mistake. This is where a suitably experienced crossborder tax specialist will be valuable, as they can liaise with the ATO on your behalf.

How to repatriate income or assets

Before moving funds out of an overseas account, company or trust it is important to ensure that taxpayers seek advice on the implications in Australia and the other country involved.

This is a complex area and the interaction between the tax laws of different countries requires careful consideration to avoid unexpected consequences. As with declaring overseas assets, engaging a cross border specialist will be very important to ensure that all bases are covered.

Get guidance and advice

If you need to clarify your residency status for tax purposes or are uncertain about the tax treatment of income, please contact Bates Cosgrave on 02 9957 4033 today.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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