In March, we sent out an Update about the ATO’s voluntary disclosure initiative for unreported offshore income, Project Do It: 'Undisclosed Offshore Assets & Income: ATO announces Project DO IT: disclose offshore income today'. The ATO also published an update last week, encouraging tax practitioners to consider Project Do It when preparing tax returns for clients, at tax time.
This is a friendly reminder if you have clients who will, or should, make a disclosure under Project Do it, work should be getting underway now.
The ATO will only accept voluntary disclosures made under Project Do It until 19 December 2014. The only exception is where the ATO is notified before 19 December 2014 that further time is required for a taxpayer to make a disclosure, but the maximum extension that will be given is 90 days.
There are many benefits on offer for taxpayers under Project Do It, including:
- An amendment period of four years will generally apply;
- A maximum 10% shortfall penalty;
- No reporting to other agencies;
- Allowing for offshore structures to be wound-up and funds/capital returned to Australia.
The last point is particularly important. In isolation, the repatriation of capital to Australia could trigger an Australian tax liability.
An example of this would be where a foreign trust is would up and the corpus of the trust is distributed to an Australia resident. In this case, if part of that corpus represents income previously derived, section 99B of the Income Tax Assessment Act 1936 could apply to make the corpus distribution taxable in Australia.
As such, an arrangement to wind-up an offshore structure should be agreed and documented with the ATO and also cover ‘second-round’ tax exposures like section 99B.
Importantly, this is not a time for taxpayers to be complacent or take a gamble on the risk of detection. As discussed in our last update, Australia is now a party to numerous inter-governmental financial information sharing agreements, including with jurisdictions which previously offered high levels of banking and financial secrecy. Because of this, it should now be assumed that the Commissioner already has, or can very easily obtain, information about Australian residents’ offshore financial affairs.
Five or so months to make a voluntary disclosure under Project Do It might seem like a lot of time, but the practical reality is that gathering the necessary information and documents from overseas advisors and financial institutions, as well as determining the amount of undisclosed income, can take a lot of time. Leaving it to the last minute may mean your clients lose the opportunity to participate in Project Do It and are exposed to significant income amendments and penalties.
The Commissioner has made it very clear that after Project Do it, ‘the gloves are off’ and taxpayers with undisclosed foreign income will face the full brunt of the enforcement and penalty regime the Commissioner has at his disposal.
When to ‘Do it’
Your clients should very seriously consider making a voluntary disclosure under Project Do It if they have unreported taxable income or over claimed deductions that relate to:
- offshore deposits or sources of funds, like including bank accounts and credit/debit cards;
- financial investments located offshore, such as real estate, shares, managed investments and pension funds;
- foreign resident entities or structures, such as companies, trusts, partnerships and foreign ‘exotic’ structures; and
- participation in an offshore tax arrangement, such as schemes to expatriate business profits overseas through ‘transfer pricing’ type or other like arrangements.
If there is uncertainty about whether a taxpayer is eligible to participate in Project Do It (for example, because they are already under some level of ATO scrutiny), it is possible to lodge an ‘Expression of Interest’ with the ATO. The ATO will then advise the taxpayer whether they are eligible to participate in Project Do It within 28 days of receiving the Expression of Interest. Also, if an Expression of Interest is lodged and a taxpayer subsequently becomes subject to ATO compliance activity, they will not have lost the opportunity to make a voluntary disclosure under Project Do It.
What information do you need?
For each income year you will need to provide details of the omitted foreign income, capital gains or over-claimed deductions, and details of the calculations. You will also need to provide details of all offshore structures, assets and entities related to the disclosure, and any information about advisers who assisted in setting up or maintaining any of the offshore structures (since 1 January 2006).
As mentioned above, one of the benefits of Project Do It is to allow offshore structures to be wound-up and for funds to be brought back to Australia to be used or invested in Australia. In many cases, it will be very important to ensure that the return of funds or capital to Australia from overseas does not trigger a ‘second-round’ tax exposure.
What to do next?
We recommend that as a first step, the relevant information is obtained from the overseas institutions. In our experience, different institutions will vary in the time they take to supply information, and the types of information that are available to substantiate transactions.
We can discuss options with you around disclosing the right type of information, whether it may be appropriate to lodge an Expression of Interest, and reporting the right type of income and assets that are taxable to you.
We have recent practical experience in preparing the disclosures and dealing with the ATO. We can work together with taxpayers as well as with accountants and financial advisers in preparing tax calculations and advising on any issues.
In making a Project Do It disclosure, the complexity and costs involved do not depend on the amount of money or assets involved. Disclosing unreported income from a foreign bank account could cost under $10,000.