Thinking | 27 March 2014

Undisclosed Offshore Assets & Income: ATO announces Project DO IT: disclose offshore income today

The ATO has announced what is the last chance for people to come clean about hidden overseas assets and income by December 2014.

The ATO’s previous voluntary disclosure initiatives were somewhat successful, but many people were still fearful of how far back the ATO would want to go and the potential for big penalties and even criminal charges.

After 19 December 2014, the ATO’s next project might be called “The Gloves Are Off”.

The increased transparency and exchange of information by countries globally – even the secretive ones like Switzerland – mean that government agencies and revenue authorities are now armed with considerable information.

The ATO is offering a package of sweeteners:

  • Generally only the last four years need be disclosed;
  • A maximum 10% shortfall penalty (normal shortfall interest still applies); and
  • No reporting to other agencies.

It should be assumed that the ATO now has information about Australian taxpayers’ overseas assets and that Project DO IT is about getting taxpayers to make the disclosure, rather than the ATO having to put the information together to support the raising of assessments or amended assessments, and substantial penalties.

After 19 December 2014, it’s fair to assume that the ATO will begin to chase those it knows about, but who haven’t voluntarily disclosed.  Those assessments will be accompanied by substantial penalties (up to 90%) and will not necessarily be limited to only going back 4 years.

Hall & Wilcox has been involved in assisting clients making voluntary disclosures, both under the ATO’s previous initiatives and its general audit program, particularly of high net worth families.  Austrac has been the usual source for the ATO’s interest and enquiry.  Now, it has a broader range of sources and resources, including taxpayers’ interest in self preservation!!

Other countries are taking similar action.

Australian residents who are also US citizens need to give serious consideration to whether they continue to hold US citizenship as a result of new US reporting rules that have global reach.  The rules, contained in the Foreign Account Tax Compliance Act (FATCA), were initially introduced to target those who evade paying U.S. taxes by hiding assets in undisclosed foreign bank accounts, however the rules result in the equivalent of using a sledgehammer to crack a walnut.

From 1 July 2014, FATCA will require financial institutions in Australia and globally, such as banks, stock brokers, hedge funds, pension funds, insurance companies and trusts to report directly to the IRS all clients’ accounts owned by U.S. Citizens and U.S. Green Card holders. If an institution does not comply, the U.S. will impose a 30% withholding tax on all its transactions concerning U.S. securities, including the proceeds of sale of securities. Americans residing in Australia who have significant non-US assets also need to complete a new type of filing, a Form 8938 reporting requirement, and will risk significant penalties if they fail to do so.

The problem may be compounded for Australian residents who did not realise that they were US citizens or, if they did, did not know that they needed  to file US tax returns and may be exposed to a ‘catch-up’ of US taxes. This will be pf particular concern for certain types of income or gains that are taxable in the US, but not in Australia, such as the sale of the family home.

The financial and time burden of these new measures will give US citizens cause to consider whether to renounce their citizenship and/or liquidate their US assets, which can have Australian tax implications. If you have any clients who are or may be US citizens, the implications of the new rules needs to be fully considered.

Similarly, in Israel, new rules from 1 January 2014 will capture many trusts with an Israeli connection.
On 1 January 2014, new Israeli legislation came into effect which is having far-reaching and serious tax consequences worldwide. This new law has drastically changed the Israeli trust landscape and has had the effect of capturing potentially millions of trusts worldwide into the Israeli tax regime.

Previously, if a trust was settled outside of Israel by a non-Israeli resident, it attained the unique (and now obsolete) classification as a ‘Foreign Settlor Trust’. This type of trust had the attractive features of not only having its general income tax-exempt in Israel, but even distributions to Israeli-resident beneficiaries were also tax-exempt.  Now under the new law, only trusts that were settled outside of Israel and exclusively have (and have always only had) non-Israeli beneficiaries will qualify as a ‘Foreign Resident Trust’. Otherwise, all other trusts will now be classified either as an ‘Israeli Beneficiary Trust’ or even an ‘Israeli Resident Trust’. While the former still retains some tax concessions, the latter is required to pay full tax on its worldwide income as if it was settled in Israel.

If a trust satisfies the relevant conditions to be eligible to being classified as an Israeli Beneficiary Trust (namely, that the settlor is still alive and that the beneficiaries and settlor are ‘directly’ related) the trustee is obligated to notify the Israel Tax Authority of its eligibility and make a non-revokable election on how it wants to be taxed before 30 June 2014.

So, the traditional tax planning by non disclosure is well and truly a thing of the past.

To view the Australian Taxation Office Undisclosed Offshore Assets & Income press release please click here.

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