The Australian Tax Office (ATO) has announced that it will be ramping up its audits and reviews of Australian-resident taxpayers who try to disguise foreign source income as it notices an uptick in such errant arrangements. The ATO plans to crack down on foreign income disguised as gifts and loans.

On Friday 17^th September, the ATO published Taxpayer Alert TA 2021/22, emphasizing its concern regarding Australian residents who try to evade or avoid tax on their foreign assessable income by hiding the nature of the money repatriated to Australia by disguising them as either a gift, or a loan, from a related overseas entity.

The ATO is also worried that such purported loans could be used to claim deductions for interest that was never incurred. That’s why the ATO plans to crack down on foreign income.

In a statement published by the ATO, omitted foreign income is defined as either overseas employment or business income, interest from foreign financial institutions or loans, dividends from foreign companies, a capital gain on the disposal of a foreign asset, or deemed amounts of foreign income in relation to interests in foreign companies or trusts.

To prevent these arrangements from occurring, the ATO has started using its exchange of information powers to gather information from other countries, and data from the Australian Transaction Reports and Analysis Centre (AUSTRAC) that identifies movements of funds into Australia.

The Common Reporting Standard (CRS) also offers the ATO shared data on financial account information of foreign tax residents with over 65 foreign tax jurisdictions across the globe.

The ATO has encouraged Australian taxpayers who have entered into such arrangements to be honest, sending a serious warning to taxpayers and their advisers to be aware that those who are found guilty of entering such arrangements are likely to face significant penalties, including sanctions under criminal law.

“We are currently reviewing these types of arrangements and actively engaging with taxpayers who have entered such arrangements to ensure that they pay the correct amount of tax. We are issuing this Taxpayer Alert to warn and deter taxpayers and advisers from entering these arrangements. Taxpayers who have not derived any foreign income and have received a genuine gift or loan from a family member overseas should not be concerned,” said the ATO.

“However, those taxpayers deliberately omitting foreign income, concealing their interests in foreign assets or making false claims for deductions in their tax returns will face substantial penalties, including possible sanctions under criminal law,” continued the ATO.

New Reporting Regime Announced For Share Economy

The popularity of the share economy has created opportunities for thousands of people across Australia to earn additional income. Examples include working as an Uber driver with a car you already own or letting someone stay at your home through Airbnb for a short period of time. These examples require little capital investment to be made by the person working within the share economy.

The income made by Australians via the share economy is subjected to income tax, however it appears that not everyone who is working in the share economy is declaring the income on their tax returns when they should be.

Black Economy Taskforce

The Black Economy Taskforce is part of the federal Treasury. It has been created to establish policy responses to combat the black economy. Today, the black economy means much more than undisclosed cash income, and includes activities such as identity theft, illegal phoenixing, and GST fraud.

Although the vast majority of people do the correct thing and don’t break the law, those who don’t cause harm to others, such as concentrating a heavier tax burden on everybody else, and undercutting honest business owners.

New reporting obligation

A lot has changed in recent years and the problems mentioned above cannot be tackled by traditional tax enforcement measures alone. This latest measure, which serves a purpose to crack down on the share economy, is to compel “electronic distribution platform” (EDP) operators such as Uber, Airbnb, and Deliveroo to report information about their platform users to the ATO.

Draft legislation has been released and, if enacted, will be the latest addition to a number of existing payments reporting systems.

It is proposed for the reporting regime to apply as follows:

• From 1^st July 2022 for taxi and ride-sourcing travel, and short-term accommodation.
• From 1^st July 2023 for asset sharing, food delivery, tasking-based services, and other services.

The structure of the share economy is such that it does not use cash, and so records of earnings, bank account deposits, etc are simply there to be seen. However, it is costly and weighty to administer tax compliance by the traditional way of investigating individual taxpayers. Instead, it is far more effective to receive standardized reported data from EDP operators, and then data-match to disclosures on tax returns. This efficiently identifies discrepancies, which can then be investigated further.

The ATO plans to crack down on foreign income, the information that will be required to be reported will include the individual’s name, ABN, and total payments received. EDP operators will be required to report the data to the ATO annually, although the ATO has the power to require more frequent reporting.