Foreign source income alert from ATO
Recently the ATO issued a tax alert TA2012/1 in relation to foreign source income by Australian tax residents.
The alert applies to arrangements which feature the following:
1. An individual (“the taxpayer”) is a resident of Australia for tax purposes
2. The foreign source income may include (but is not limited to) :
- Interest accrued in an offshore bank account
- Income derived from a foreign investment (e.g. dividend or rental income)
- Income from an asset that has been inherited from an overseas source
- A foreign pension or annuity
- Foreign business income
- Capital gains arising from disposal of overseas asset
- Attributable income from interests in offshore entities even if the income has not been distributed
3. The foreign source income is received in Australia or accumulated offshore.
4. The taxpayer does not correctly disclose their interest and/or involvement in deriving foreign source income and does not pay Australian tax on this income.
Non-disclosure of foreign source income
5. The non-disclosure by the taxpayer may arise through:
a. accumulating the income in an offshore bank account;
b. accumulating or reinvesting income in other assets or entities offshore;
c. transferring funds to the taxpayer through the use of purported loan arrangements; and/or
d. accessing funds in an offshore bank account through the use of debit or credit cards by the taxpayer in Australia or elsewhere.
6. In some instances, another entity (for example, a promoter) may act on behalf of the taxpayer who is a beneficiary of an offshore structure or investment, to conceal the true control of the entity or the beneficial interest in the income or assets.
7. In some arrangements, documentation supporting the above transactions is absent, incomplete or falsified.
The ATO considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether:
(a) the foreign source income may be assessable to the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997);
(b) the foreign source income may be assessable to the taxpayer and/or their associates (such as an entity acting as trustee for the taxpayer) under the trust income provisions in Division 6 of Part III of the ITAA 1936;
(c) any income accrued offshore may be attributable to the taxpayer under Australia’s anti-deferral regimes within Part X, former Part XI or Division 6AAA of Part III of the ITAA 1936;
(d) taxable capital gains may arise to the taxpayer on the disposal of offshore assets under Part 3-1 or 3-3 of the ITAA 1997;
(e) the foreign source income is assessable to the taxpayer under another provision of the tax law;
(f) all or any part of the arrangement (such as any purported loans) may constitute a sham at general law;
(g) the general anti-avoidance provisions in Part IVA of the ITAA 1936 may apply to an arrangement which is entered into with the sole or dominant purpose to obtain a tax benefit; and
(h) any taxation statements made in relation to the arrangement may be false or misleading.