If you earn income outside Australia, then you need advice on the best way to handle your Australian tax affairs. This is a major ATO focus, and they are set to audit “new” Australians who bring capital into Australia which has not been declared as income.
The recent cases demonstrate that individuals who have business interests outside of Australia need to keep a record of their foreign business interests and transactions.
If you do not keep evidence of your foreign dealings, you may expose your interests to significant risk. The Australian Taxation Office (“ATO”) is targeting those with foreign bank accounts income, assets or other international interests. In the recent case of Gui Ping Wu v Commissioner of Taxation  AATA 78, a Chinese citizen (who was an Australian resident) lost a considerable amount of personal funds originally from his Chinese bank account because he did not provide the ATO with sufficient evidence to prove the accuracy of his Australian tax return.
If the ATO performs a “re-assessment” of your Australian personal income tax return and discrepancies are found, you can be taxed the applicable income tax rate in addition to a severe shortfall penalty. This cumulative taxation and penalty rate can be up to 90% on your foreign business interest. Additionally, the ATO’s calculation for an imposed shortfall penalty may substantially exceed the correct shortfall amount, which you can be liable to pay.
- So how do you protect yourself?For those already living in Australia (whether you are a citizen or a resident), seek professional taxation advice and keep all relevant documentary evidence of your foreign business dealings. Whether you are looking to pre-emptively safeguard your foreign interests or the ATO is conducting a “re-assessment” of your personal income tax return, Irish Bentley Lawyers can minimise the risk of exposing your interests to harsh penalties or overvaluations of potential shortfalls.If you intend to become an Australian resident with a bank account, assets, income or other international business interests, it is critical to ensure that your foreign interests are protected. Irish Bentley Lawyers has worked extensively with the Department of Immigration and Border Protection and the ATO. We can streamline the migration process while providing the best protection for your interests.
- How to Protect Yourself as a TaxpayerHow to minimise risk and avoid shortfall penalties due to non-disclosure of foreign income or assets:
- Declare all income earned in Australia and internationally on your Australian personal income tax return.
- Keep complete and precise foreign financial transactional records for the requisite statutory time periods.
- Disclose foreign assets over $50,000 on your personal tax return.
- Seek Australian professional taxation advice.
Australian resident taxpayers must declare all income earned (whether it is earned in Australia or internationally) on an Australian personal income tax return. Discrepancies between your personal income tax return and your ATO tax assessment can trigger the ATO to re-assess your tax payable to include both shortfall and interest penalties, which can be up to 90%. The ATO’s calculated shortfall may substantially exceed the correct shortfall so you need good records to ensure the correct shortfall is applied.
- What do you need to know if the ATO re-assess your tax?
You need to contact a tax lawyer experienced in residency matters as soon as possible. The law relating to Controlled Foreign Company and Foreign Investment Funds is complex and your tax lawyer should also be experienced in double tax treaties, along with principles and the way the ATO treat same.
Irish Bentley Lawyers have handled complex ATO residency cases contesting tax re-assessment exceeding $50 million.
- What records do you need to keep?
The taxpayer bears the burden of proving their assertions on personal income tax returns. This requires sufficient documentation relating to foreign income, assets, transactions and business interests. If the taxpayer cannot prove the correct tax payable, shortfall and interest penalties can be imposed and you will not have the evidence to challenge an overvaluation of those shortfall penalties.
To minimise risk:
- keep precise and complete foreign financial and transactional records should be maintained; and
- seek advice from a tax lawyer experienced in residency matters.
- The Law
In the matter of Gui Ping Wu v Commissioner of Taxation (2015 AATA 78), a Chinese citizen Mr. Wu (who migrated from China) came to Australia. Holding a State/Territory Sponsored Business Owner (Provisional) (Subclass 163) visa. In 2009, Mr. Wu was granted permanent residency by the Australian government.
At all material times, Mr. Wu had business interests in Australia, China and Malaysia. From 2009 to 2012, Mr. Wu failed to disclose the following overseas assets and income in his Australian personal income tax return:
- Mr. Wu transferred funds from one of his Chinese bank accounts to his Australian bank account. According to Mr. Wu, these deposits came from savings held in China and therefore, did not constitute income earned in the applicable taxation period.
- Mr. Wu withdrew funds from multiple Chinese bank accounts and deposited these funds into his Australian bank account. Mr. Wu alleged that these funds were a share of profits from a business partnership in China.
- Mr. Wu received income as an employee of a Chinese company and a salary certificate which was provided by Mr. Wu to HSBC for a housing loan stated that Mr. Wu was the “M.D.” of the company. The point of contention on this income between Mr. Wu and the ATO was the amount of income paid by the Chinese company to Mr. Wu. The Commissioner of Taxation submitted that the income totalled RMB 2,200,000 ($430,417 AUD using current exchange rate) annually whereas Mr. Wu argued that the amount was substantially lower.
As the taxpayer, the burden was on Mr. Wu to provide documentation to support his assertions.
The AAT agreed with the Commissioner of Taxation that Mr. Wu had not satisfied his evidentiary burden in relation to the undisclosed deposits. The Commissioner highlighted five difficulties with his evidence:
- The absence of any bank statement or documentation evidencing the savings amounts in China or any history of the business partnership in China.
- Failing to provide the ATO or the AAT a “very precise” or clear explanation of the savings or business partnership.
- Failing to disclose his savings in China on his Australian visa application.
- His 2009 tax return failed to disclose any interest or ownership in assets outside Australia with a total value greater than $50,000 AUD.
- An incorrect claim by Mr. Wu that the transfer of funds was in partial satisfaction of his visa conditions. The evidence of which was provided by Mr. Wu’s accountant, Mr. Pang.
The AAT found Mr. Wu’s conduct was reckless as he exhibited gross indifference to the true character of his income. On multiple occasions, Mr. Wu’s tax agent asked him whether he had foreign income, and Mr. Wu denied any income had been earned.
The AAT did however find that there was sufficient evidence to prove that the income received by Mr. Wu from the Chinese company was substantially lower than the income that the Commissioner of Taxation has alleged.
The inability of Mr. Wu to provide sufficient evidence to prove his assertions on his personal tax return had significant monetary consequences. The ATO imposed a penalty of 50% of the shortfall amount of the unreported income. Upon the ATO’s assessment, the unreported income was subject to both the personal income tax rate and a 50% shortfall penalty rate.
- Engage a tax lawyer experienced in ATO residency law
Irish Bentley Lawyers have extensive expertise in acting for Clients in tax residency matters contesting re-assessments exceeding $50 million and have represented the major cases in residency law flowing from Wickenby (Leitchenstein, Vanuatu, Singapore) and more recently the Panama Papers (Hong Kong, BVI, various Caribbean countries).
Our fixed initial consultation price is $330 and we will outline the issues, the options, and costs, and the best way forward.
We also have some 14 years’ expertise in migration law through our migration law division which has helped countless new Australians sort out the tax residency issues associated with migrating in Australia. This experience in migration matters has helped us to formulate residency arguments.
Arrange an appointment with us on +617 3229 4060 or email us at firstname.lastname@example.org.
Irish Bentley Lawyers have significant experience and an outstanding reputation in taxation law with Australian citizens and residents. We have dealt extensively with all types of taxation matters and the ATO.
Our firm is a proud winner of the 2015 and 2016 Taxation Awards and Zeke Bentley (Principal of Irish Bentley Lawyers) has been interviewed by numerous media about taxation law.
Disclaimer: The above does not constitute legal advice and Irish Bentley Lawyers make no representations or warranties as to the accuracy of any of the information contained herein. If you have a taxation issue, please do not hesitate to contact the team at Irish Bentley Lawyers.