Tax: The Tax Office is using increasingly sophisticated tools to track tax evaders, says Jennie Granger.
Last financial year around $5.1 billion left Australian shores for tax havens. While this figure may not seem significant when compared with the total flow of funds from Australia to its four major trading partners last year of $1526bn, it is enough to make us keep a close eye on tax haven dealings.
Why tax havens?
There is nothing wrong with holding an offshore account or investing overseas, as long as you pay any Australian tax due.
Our message is simple all income must be declared. Australian residents are subject to tax on their income from all sources inside or outside Australia.
Many tax havens are major financial centres and we recognise there are legitimate reasons for transacting with them. For example, Australian subsidiaries of overseas multinational companies may need to transact with tax haven companies and governments may transact with tax havens to provide foreign aid programs in those countries.
Operating in a global economy means an increasing proportion of Australian business, investment and employment is derived from international dealings. As many as 40 per cent of our exporters are small businesses and about one million Australians work overseas.
However, the Tax Office is concerned some Australians don't understand or choose not to comply with tax laws relating to financial dealings with tax haven countries.
The systems that make tax havens attractive for legitimate purposes can also be used in arrangements designed to avoid paying tax elsewhere, particularly tax havens that trade on secrecy and non-cooperation.
This lack of transparency and effective information exchange means the Tax Office is often unable to gain a complete picture of people's financial activities, particularly those who seek to conceal their income or make false or inflated claims.
This leaves other Australians bearing a greater tax burden.
If left unchecked, abusive arrangements of this kind undermine community confidence in, and the integrity of, our tax system.
Compliance activity
In 2006 the Tax Office conducted around 170 audits and reviews relating to tax havens. The result? It gathered around $250 million in taxes and penalties. Compliance activity has increased where taxpayers have unexplained overseas transactions. This includes risk reviews and audits across a range of taxpayers from individuals, small, medium and large enterprises and high wealth individuals.
In July 2007 the tax commissioner announced an initiative to encourage people to make a voluntary disclosure of any unreported offshore income. More than 1000 letters have since been sent to people who have transactions with tax havens or offshore credit or debit cards asking them to review their tax affairs and, if required, make a voluntary disclosure of any unreported offshore income.
The Tax Office has also put in place a dedicated team of 50 tax officers, in addition to Project Wickenby, targeting those who try to conceal assets and income in tax havens.
They are already helping those who have chosen to come forward voluntarily, while moving into the follow-up phase for those who have ignored our first letter.
Since July 2007 announcement, there have already been 177 voluntary disclosures totalling $7.1m in taxable income. The largest adjustment made to date is $1.6m in tax, penalties and interest over a four year period.
It's not too late for people to put things right and receive reduced penalties, but they must come to us before they are the subject of an audit. Compliance activity in this area has also been ramped up and people are urged to take advantage of the opportunity to talk to us about any unreported income offshore as soon as possible.
If the undeclared income is less than $20,000 the shortfall penalty will be waived and if it is over this amount the shortfall penalty will be capped at 5 per cent.
By contrast, where there is no voluntary disclosure and people intentionally disregard the tax law, penalties can be up to 75 per cent of the tax shortfall.
However, the benefits for people coming forward are not only financial it's also about peace of mind if you're concerned about your overseas assets and income. For example, one taxpayer told the Tax Office that since they had arrived in Australia they had always wanted to clear up the disclosure of income relating to their offshore assets.
The initiative had provided them with the opportunity to close the issue once and for all.
Working with others
Australia has made a number of breakthroughs in detecting, investigating and dealing with abusive tax haven arrangements in fact, tax administrations around the world are continually improving how they deal with compliance issues surrounding tax havens.
We are working closely with other tax administrations on best-practice compliance approaches and sharing intelligence and information under our tax treaties.
Increased information sharing with other tax administrations, the use of more sophisticated analytical tools and law changes are helping us to detect and deal with these types of arrangements.
Tax information exchange agreements increase the transparency of cross-border transactions and complement the intelligence we already gather through the Australian Transaction Reports and Analysis Centre (AUSTRAC), overseas revenue authorities, other government departments and law enforcement agencies.
Australia receives automatic exchange of information data from 23 treaty partners on a regular basis. We receive around 500,000 records each year related to various types of income derived from Australians overseas including interest, dividends, royalties, pensions, salary and wages, independent personal services, capital gains and rental income.
Australia also sends around 1.6 million records to treaty partners every year. Of the 33 jurisdictions considered to be tax havens, most have committed to working towards improving their transparency and information exchange with OECD members.
Information exchange
In addition to our tax treaties with other countries, Australia is undertaking a comprehensive program to negotiate tax information exchange agreements (TIEAs) with a number of tax haven countries.
TIEAs are a significant step forward in Australia's efforts to prevent offshore tax evasion and avoidance. They allow us to request information if non-compliance is suspected.
The Australian government has already concluded agreements with Bermuda, Antigua and Barbuda and the Netherlands Antilles. Negotiations are well underway with another eight tax havens and will commence soon with a ninth.
The tax profession
Tax and accounting practitioners play an vital role. A number of tax agents have arranged for their clients to contact us to discuss their concerns about undisclosed income in offshore accounts.
If tax practitioners suspect their client may be involved in a 'dodgy' scheme involving tax havens they should strongly encourage their client to make a voluntary disclosure as quickly as possible. Sometimes tax and accounting practitioners are in a position to alert us to questionable schemes being encouraged by promoters. Ensuring the integrity of the tax profession helps to support fair competition in the industry.
The Tax Office conducts risk profiles of tax practitioners to identify and manage compliance risks. We also monitor activity that may indicate aggressive tax planning and investigate and refer for prosecution those few who are engaged in tax crime.
We will use new promoter penalty legislation which provides substantial increased penalties for unscrupulous operators who promote financial arrangements aimed at evading tax, often to the detriment of both taxpayers and ethical advisers.
Helping people comply
The Tax Office is making extra efforts to inform and educate people about the pitfalls of tax haven-related tax avoidance and evasion.
The latest Tax havens and tax administration booklet was launched last October and aims to address misconceptions and alert people who have been misinformed or simply have the wrong idea. The booklet, a useful tool for both advisers and their clients, is designed to help people better understand their tax obligations when investing offshore and alerts them to the risks of getting involved in questionable arrangements.
The improper use of tax havens or bank secrecy provisions continues to be a risk for the tax system. The Tax Office aims to optimise voluntary compliance, enhance transparency and build community confdence in our tax system. Our compliance activities around tax havens reflect these aims.
Jennie Granger is second commissioner of taxation at the Tax Office.
Further information
voluntary disclosures of unreported offshore income to the Tax Office can be made by calling 1300 132 346 or emailing offshorecompliance@ato.gov.au
