The Australian Taxation Office (ATO) has recently made changes to its website on Project DO IT. These changes clarify the broad eligibility criteria for taxpayers to obtain the amnesty from the ATO for omitted offshore income, capital gains and over-claimed deductions. They address the concern about whether Project DO IT applies to intentional and serious tax wrong doings by taxpayers.
The deadline for making the disclosure to the ATO is 19 December 2014. As the information gathering process could be a lengthy process, taxpayers should now consider whether they are eligible to take up this offer from the ATO and the appropriate strategy for minimising the risk of disclosure not being accepted by the ATO.
Project DO IT
Project DO IT is an initiative announced by the ATO on 27 March 2014. It provides an amnesty for certain eligible taxpayers to disclose omitted offshore income, capital gains and over-claimed deductions. Taxpayers must disclose offshore income, capital gains and over-claimed deductions to the ATO by 19 December 2014. The benefits offered by Project DO IT are discussed below.
Click here to view the ATO's publication on Project Do IT.
Scenarios of eligible taxpayers
On 21 July 2014, the ATO made some changes to its website on Project DO IT as a result of comments received about the various eligibility scenarios it had published. There had been concerns that as the culpability in the previous eligibility scenarios were too trivial or minor, Project DO IT may only apply to very limited scenarios, and not apply to scenarios involving intentional or serious tax wrong doing by taxpayers. Accordingly, the ATO made changes that help clarify the broad eligibility criteria for Project DO IT.
As a result of the changes made by the ATO to the eligibility scenarios, eligible taxpayers may wish to consider taking the opportunity to disclose to the ATO any omitted offshore income, capital gains, or over-claimed deductions.
The ATO added a scenario relating to whether a person had diverted Australian income offshore or over-claimed offshore deductions relating to Australian income. This scenario involves an Australian individual establishing an entity in a tax haven. This offshore entity issued invoices to the individual for services that were not provided or the amount charged was significantly inflated. Payments were made by his Australian business, and false or inflated deductions were claimed in the individual's Australian business' tax returns. The offshore entity transferred the funds received to another related offshore entity for the benefit of this individual.
The ATO states that Project DO IT allows this individual to disclose the offshore structures and any omitted offshore income for the years required, and obtain the benefits under Project DO IT.
Accordingly, by adding this additional scenario, the ATO has clarified the potentially wide application of Project DO IT.
There are, however, some exclusions from Project DO IT. These exclusions are as follows, and taxpayers who fall within any of these exclusions cannot get the benefit of Project DO IT:
- The taxpayer is already subject to an ATO audit in relation to the omitted offshore income, capital gain or over-claimed deduction.
- The taxpayer has already received a compulsory information-gathering notice (eg a notice under s264 of the Income Tax Assessment Act 1936 (Cth)) requiring them to produce information relating to the offshore income, capital gains or over-claimed deductions.
- The taxpayer has been involved in promoting or marketing tax evasion schemes.
- The taxpayer is already under criminal investigation concerning tax-related criminal offences or has been previously convicted.
- The taxpayer's foreign assets or income were derived from serious criminal offences unrelated to tax.
- The taxpayer has not complied with specific obligations from a previous offshore voluntary disclosure initiative that the taxpayer was involved in.
Taxpayers who want to get the benefits of Project DO IT should consider whether they want to make the disclosure on a no-name basis initially and the appropriate strategy to reduce their risk of their disclosure not being accepted by the ATO. An expression of interest could be made to the ATO which includes the details of the kinds of offshore assets and income involved. It would then be possible to deal with the ATO to determine where the ATO would consider the taxpayer is eligible to participate in Project DO IT. Eligible taxpayers will then have additional time to finalise their disclosure statements and submit them to the ATO.
Although the deadline for making the disclosure is 19 December 2014, taxpayers who want to get the benefits of Project DO IT should act now and not put it off to the last minute. Gathering the relevant information and documentation from offshore could be a lengthy process.
Benefits for coming forward to the ATO
If a taxpayer comes forward and makes the relevant disclosure to the ATO and the disclosure is accepted by the ATO under Project DO IT, the following benefits apply:
- The ATO only seeks information relating to assessing tax for the years where the time limit for amending the taxpayer's assessment has not yet expired (generally four years). The ATO will not form an opinion of fraud or evasion.
- If the additional income is more than $20,000 in the income year, the taxpayer will only be liable to a tax shortfall penalty of 10% (rather than a higher amount, up to 90% in some circumstances) on the tax owing to the ATO. Interest charges at normal rates on the tax owed will apply.
- If the additional income is $20,000 or less in the income year, there will be no shortfall penalty, although interest charges at normal rates on the tax owed will still apply.
- The ATO will not investigate the taxpayer's disclosure for the purposes of prosecuting the taxpayer for a criminal offence, and will not refer the taxpayer for criminal investigation by another law enforcement agency. However, this does not grant any amnesty from investigation by another law enforcement agency or prosecution by the Director of Public Prosecutions.
- Benefits also apply to winding up offshore structures and transferring of offshore assets to Australia.
Consequences for not coming forward to the ATO
If eligible taxpayers who do not come forward to the ATO to disclose their omitted offshore income, capital gains or over-claimed deductions by 19 December 2014, the following consequences may apply:
- Potential referral by the ATO for criminal investigation.
- Payment of the outstanding tax and interest owed to the ATO.
- A full audit of the taxpayers' tax affairs.
- Penalties on the tax shortfall of up to 75% (90% in some circumstances).
Checklist of relevant issues for consideration
Below is a list of relevant issues for taxpayers considering making disclosure to the ATO under Project DO IT:
- Does the taxpayer fall within the eligibility criteria?
- Does the taxpayer fall within any exclusions?
- What are the consequences for not coming forward to the ATO before 19 December 2014?
- Whether the activities the taxpayer will disclose could constitute a criminal offence. Even if the taxpayer comes forward to the ATO, the ATO cannot grant any amnesty from investigation by any other law enforcement agency or prosecution by the Director of Public Prosecutions. If taxpayer considers making a voluntary disclosure, the taxpayer should consider and should obtain legal advice on whether the activities they will disclose could constitute a relevant criminal offence.
- Whether there will be other obligations under the Anti-Money Laundering and Counter Terrorism Financing Act 2006, where offshore assets are being transferred or repatriated under Project DO IT. Coming forward to the ATO does not give any exemption for any obligations under the Anti-Money Laundering and Counter Terrorism Financing Act 2006.
- How to manage the risk of disclosure not being accepted by the ATO? Consider making an initial expression of interest on a no-names basis. Even if the taxpayer makes the disclosure, the taxpayer would not be able to obtain the benefit under Project DO IT unless the ATO accepts the taxpayer's disclosure.
- What is the relevant income tax assessment amendment period? Which income tax returns can the ATO amend? Does the taxpayer have any omitted offshore, capital gains or over-claimed deductions for these income years? Who is the relevant taxpayer? Who should disclose?
- Whether the taxpayer wants to use any carry-forward losses from their offshore investments and business activities. Project DO IT does not apply to any carry-forward losses from offshore investments or business activities.
- Whether the taxpayer needs to apply to the ATO for an extension to the deadline for making the disclosure to the ATO.