AUSTRAC collects and shares financial data with the ATO. The ATO uses this data to identify individuals who may not be declaring all of their income. Taxpayers should expect the ATO to review funds coming into Australia – regardless of the amounts – and be prepared to explain the source of those funds.
The challenge of providing the right evidence
There is a wide range of reasons for receiving funds from overseas. These include:
- funds received by the taxpayer as an agent for the owner of the funds
- transfers by a foreign resident of their foreign source income into a joint account
- funds that represent the assessable income of a resident taxpayer.
In all tax matters, the taxpayer has the burden of proof. In a review or audit, the taxpayer must provide sufficient evidence to satisfy the ATO that the amounts are not income.
Practically, the challenges that taxpayers often face in a review or audit include:
- remembering the source and purpose of numerous transfers that may have occurred several years ago
- gathering sufficient evidence to satisfy the ATO that the funds were not income – particularly where the reason for the transfer is unusual or where the transfers are part of a family arrangement and there is little or no documentation to support the taxpayer’s explanation
- explaining the practices of foreign exchange companies, whose internal processes may distort the data collected by AUSTRAC – for example, a transfer of USD10,000 that is converted to AUD and deposited into an Australian bank account by a foreign exchange company may be picked up by AUSTRAC as a transfer of AUD4,387.92 from Canada, AUD7,258.68 from China and AUD3,353.40 from Singapore.
What is the right evidence?
The right evidence depends on the reason the funds are not assessable income for the taxpayer.
In each case, it is important to provide the ATO with evidence of the source and reason for the foreign fund transfers as early as possible.
An effective response should also provide a ‘narrative’ of the taxpayer’s activities. Providing this explanation is particularly important where the transfers are unusual in amount or frequency or are otherwise not supported by documents.
What happens if the ATO does not accept the evidence?
If the ATO does not accept the evidence, the taxpayer should expect assessments from the ATO treating those amounts as income.
Where deposits remain unexplained, there is also a risk of the ATO forming an opinion of ‘evasion’. This allows the ATO to include unexplained deposits in the taxpayer’s assessable income outside the standard two or four year amendment periods. Interest and penalties of up to 90% of the tax shortfall may also be imposed. You can read more about this particular issue here.
Once the ATO issues assessments, the taxpayer has objection rights. In lodging a notice of objection to the assessments, the taxpayer still has the burden of proving the correct amount of their taxable income. It is important to check whether, based on the evidence provided to date, the taxpayer has met their burden of proof. If not, further evidence has to be gathered.
What can taxpayers do to protect themselves?
Taxpayers who regularly receive funds from overseas should gather evidence to support their position if those amounts are not income. This includes evidence of transfers under family arrangements.
If a taxpayer discovers that they have undeclared foreign income, they should consider making a voluntary disclosure to the ATO to increase their chances of having any penalties remitted.