Are you receiving income from overseas?  If so, you must ensure that you declare this foreign income in your annual tax returns.  If you do not, the Taxation Administration Act 1953 (Cth) (TAA) allows the Australian Taxation Office (ATO) to impose interest and penalties with respect to the undeclared foreign income.

What is foreign income?

Foreign income includes foreign pensions, annuities, employment income, investment income, business income and capital gains on overseas assets (Foreign Income).  If you are an Australian resident (Australian Resident) for tax purposes (the definition of which has a number of tests), you will be taxed on your Foreign Income.

If you fail to disclose any Foreign Income in your tax return, you can tell the ATO about the Foreign Income by way of a voluntary disclosure.

What is a voluntary disclosure?

A voluntary disclosure allows a tax payer to tell the ATO about mistakes or omissions that they may have made in their tax returns including failure to include Foreign Income.

A voluntary disclosure must be made in the “approved form”.  While the ATO often does not provide a pro forma document that can be used, a voluntary disclosure must:

  • include the relevant information;
  • be addressed to the appropriate ATO department; and
  • include relevant declarations required by law.

In assessing your voluntary disclosure, the ATO will use the information that you have provided to ascertain the amount of tax that you are liable to pay on the Foreign Income (that you previously did not disclose).  This is known as the shortfall amount.

What interest and penalties may apply?

Under the TAA the ATO may charge interest on the shortfall (known as a shortfall interest charge).  This interest is usually applied from the day that the tax on the Foreign Income would have been due for payment if it was reported and ends on the day before the Commissioner of Taxation gives the taxpayer a notice of assessment which includes the shortfall amount (being the amount of tax payable on the Foreign Income).

There are certain circumstances in which a taxpayer may apply for the shortfall interest charge to be remitted and care must therefore be taken when providing the ATO with a voluntary disclosure to ensure that all the relevant information and submissions with respect to remission are included.

In addition to the shortfall interest, which is intended to “restore a fair balance between taxpayers[1], the ATO may also impose administrative penalties “which relate to the taxpayer’s behaviour leading up to and making a statement that results in a shortfall amount[2] (i.e a voluntary disclosure).

Like shortfall interest, it’s possible for the administrative penalties to be remitted, or partly remitted in certain circumstances.

What happens if you do not make a voluntary disclosure?

Even if you do not disclose your Foreign Income, or you fail to tell the ATO about mistakes or omissions that you may have made, the ATO may still know about your overseas activities.

AUSTRAC is Australia’s specialist financial intelligence unit which assists the investigation and prosecution of serious criminal activity including money laundering and tax evasion.  AUSTRAC allows the ATO to:

  • monitor and analyse financial transactions;
  • share and receive information from domestic and intentional agencies and counterparts; and
  • use AUSTRAC information to identify suspected tax avoidance, including abuse of overseas tax and secrecy havens[3].

Further assistance

We can assist you with:

  • determining whether or not you are an Australian Resident for tax purposes and whether or not you are receiving Foreign Income; and
  • drafting your voluntary disclosure to ensure that it complies with the ATO’s criteria and includes the relevant information with respect to the possible remission of interest and penalties.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.

[1] Australian Taxation Office Practice Statement Law Administration 2006/8 – “Remission of shortfall interest charge and general interest charge for shortfall periods” at 4A.

[2] Ibid at 4B.