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Cooper Grace Ward Lawyers’ Sarah Lancaster, Senior Associate and Fletch Heinemann, Partner, discuss how the ATO is using foreign bank information to recover unpaid tax from Australian taxpayers who have failed to declare foreign income.
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From 2018, the ATO will use foreign bank information to recover unpaid tax from taxpayers who have not declared foreign income.
The ATO’s sources of information are expanding. Taxpayers can no longer earn income offshore and expect that their tax affairs will not be reviewed.
The case of Bosanac v Commissioner of Taxation [2018] FCA 946 highlights the difficulties taxpayers have when they are assessed to pay tax on foreign income, particularly when they have not included any taxable income in their returns.
WHAT HAPPENED IN BOSANAC?
Vlado Bosanac earned money from:
- the sale of shares in Singapore; and
- providing consultancy services – either personally, or through offshore companies that he controlled.
During the eight years in dispute, Mr Bosanac did not lodge a tax return.
After an audit and objection decision, the ATO issued:
- amended assessments to Mr Bosanac significantly increasing his taxable income; and
- penalty assessments requiring Mr Bosanac to pay penalties at 75% for intentionally disregarding a taxation law.
The administrative penalties were then increased by another 20% for subsequent years in the review period. This was because the Commissioner believed Mr Bosanac had taken steps to prevent the ATO from finding out about the tax shortfall.
During the court case, Mr Bosanac had to prove the assessments were excessive. That required him to prove not only that the Commissioner’s assessments were incorrect, but also what his correct taxable income was for each year.
Mr Bosanac did not prove what his correct taxable income was. Although he gave testimony about his business activities and provided bank account statements, he did not:
- give detailed evidence about his offshore business structure, including who ultimately controlled Singaporean companies;
- give evidence about the consultancy services he said he provided;
- provide corroborating evidence about amounts he said were loans (and therefore not a part of his assessable income);
- have documents to support his testimony; and
- keep up to date records of income earnt from his share trading activities.
HOW CAN YOU DEAL WITH UNDISCLOSED FOREIGN INCOME?
From 2018, taxpayers must expect that their tax affairs will be reviewed by the ATO – regardless of where their accounts and entities are located.
By not making a voluntary disclosure, taxpayers risk assessments to pay penalties at 90% of the tax to be paid: effectively doubling the bill of an ATO audit. However, the risk of the ATO identifying that the tax has not been paid is now significantly higher.
The crack down on international tax evasion means that, for example, banks are collecting information about their accountholders and disclosing this information to the ATO (see our discussion on the Common Reporting Standard). The ATO also has wider access to data through releases of information such as the Panama Papers and Paradise Papers.
Once the ATO has issued an assessment involving undisclosed foreign income, the taxpayer is required to prove their case. It is not enough for a taxpayer to simply state what they believe their taxable income is during each year. To successfully prove their case, taxpayers need to provide corroborating evidence about their taxable income.
This can be a difficult task where there are not many documents either because:
- there are no documents that exist; or
- documents have been lost because of the length of time that has passed.
In Bosanac, Justice Steward recognised this difficulty where a taxpayer fails to create or retain records evidencing a course of a business.
Although the ATO no longer has its official amnesty ‘Project DO IT’ for undisclosed for income, there is still scope to reduce penalties if a voluntary disclosure about undisclosed income is made in the correct form before the ATO starts any review activity.
Sarah acts for and advises clients in a range of disputes with the ATO, OSR and Customs. Drawing on her experience in commercial litigation, she focuses on providing clients with practical, timely and cost effective strategies. Sarah provides advice and acts for clients in a variety of disputes with the Australian Tax Office and Office of State Revenue. She also acts for clients in a range of customs disputes.
Sarah’s technical experience includes representing taxpayers in disputes involving, income tax, international tax, GST, payroll tax, stamp duty and customs duty. Drawing on a background in commercial litigation, Sarah brings particular experience in evidentiary issues relevant to disputes when acting for clients during the audit and objection processes and appeals to the Administrative Appeals Tribunal, Queensland Civil and Administrative Tribunal, Supreme Court of Queensland and Federal Courts. Contact Sarah at sarah.lancaster@cgw.com.au
Fletch focuses on providing practical solutions to clients’ commercial and tax issues. With a wealth of experience managing disputes with the ATO, OSR and Customs, Fletch draws on that knowledge in providing upfront advice and helping clients deal with revenue authorities. As a partner in the commercial team, Fletch is responsible for managing a significant volume of tax and customs disputes, as well as providing tax advice across a range of commercial issues.
Fletch’s technical specialisations include income tax (including international tax and residency issues), GST, payroll tax, land tax, stamp duty and customs duties. His experience includes drafting notices of objection, private ruling applications, AAT appeals and litigation in the Federal Court. Contact at fletch.heinemann@cgw.com.au
