ATO tightens the screws on international tax

This article was current at the time of publication.

International tax is on the Australian Taxation Office (ATO) radar.

 In its recent Taxpayer Alert 2021-22 the tax regulator outlined concerns with arrangements when Australian resident taxpayers fail to declare foreign income in their Australian tax returns and then conceal the character of the income upon repatriation to Australia by disguising the funds as a purported “gift” or “loan” from a related overseas entity, including family members and friends. 

“Where the funds received are disguised as a purported ‘loan’, we are also concerned taxpayers may seek to claim deductions for ‘interest’ purportedly incurred on the purported ‘loan’,” says Karen Price, ATO Acting Assistant Commissioner Engagement and Assurance Services.

A fundamental principle of Australia’s taxation rules is that generally, Australian residents are taxable on their worldwide income, including: 

• pensions and annuities
• business activities
• employment and personal services
• overseas assets and investments
• capital gains on overseas assets.

“In some cases, the law provides exemptions and concessions, and a good tax practitioner should be aware of these,” notes Price.

Case study

Dino Del Medico CPA, Director of Melbourne-based accounting firm Austens, knew he was out of his depth when a long-standing Dubai-based client, who for 30 years had captained superjumbo aircraft around the world for Emirates, decided to return to live in Australia and wanted to repatriate some of his wealth from the United Arab Emirates.

Del Medico exercised due caution and contacted a senior figure at CPA Australia, then got in touch with a partner at professional services firm EY and was referred to its international transaction experts. 

“There was a senior meeting with the client, engagement letters were exchanged, and I was still able to generate income from the client because I was gathering that client information. 

“It wasn’t a straight handover. They would submit queries, I’d refer them to the client, and pass the information back to EY.”

How to keep your clients

The process took several weeks and wasn’t cheap, but the client, the ATO, and Del Medico were happy with the result. 

“It works both ways,” he says. “It enhanced my standing with the client as a trusted adviser. Admit your limitations. There’s a difference between tax minimisation and tax avoidance. 

“And if you can minimise tax, you should. Avoiding tax by shonky activity won’t help anyone.”

Resources and advice

Practitioners who have to deal with international risk should access the ATO’s What Attracts Our Attention resource. 

Price notes that practitioners need to consider their knowledge and experience in dealing with international arrangements entered into by their clients and the relative complexity of the issues. 

Transfer pricing, often a key focus area for multinational businesses, is a case in point. 

Smaller and emerging businesses with international arrangements would also benefit from addressing the issue of transfer pricing to ensure they carefully document the terms and conditions of their arrangements.

If in any doubt, get advice from experienced advisers at critical points during the business cycle.

“This includes when a business expands overseas and new transactions arise, ensure international related party pricing is considered along with a range of other commercial matters,” Price says.

Who’s under scrutiny?

Within the ATO there is a dedicated business line for privately owned and wealthy groups who operate some of Australia’s most successful businesses. 

The agency views privately owned wealthy groups as:

• Companies and their associated subsidiaries (economic groups) with an annual turnover of more than A$10 million that are not public groups or foreign owned.
• Australian resident individuals who, together with their business associates, control net wealth of more than A$5 million.