ATO warning on undisclosed foreign income

The ATO has warned that it will be focusing on whether taxpayers have disclosed all of the foreign income they may have derived. As a result of recent developments in information sharing programs with foreign tax authorities, the ATO has access to a broad spread of information that can be used to identify taxpayers who might not be complying with their Australian tax obligations.

As a general rule, Australian resident taxpayers are taxed on their worldwide income, even if tax has been paid overseas on this income. This would typically include things like income from offshore investments, salary and wages earned overseas, foreign pensions, business and consulting income and capital gains on overseas assets.

However, there are some exceptions to this. For example, if the taxpayer is classified as a temporary resident then they would not generally be subject to Australian tax on foreign sourced income or foreign assets. Likewise, if someone has received a genuine gift from a relative overseas then this won’t necessarily be taxed in Australia. On the other hand, if it appears that the funds have come from a foreign company then this could cause tax issues under Division 7A.

If clients have derived foreign income that is not subject to Australian tax (e.g., it was derived while they were a non-resident or temporary resident) then they should be encouraged to keep appropriate records to demonstrate this as the ATO may query this if the funds are later transferred into Australia.

If tax agents identify a client who has not correctly reported their foreign income for the current year or a prior year, they should consider making a voluntary disclosure as this can at least limit the penalties which would otherwise be applied to the tax shortfall.

For additional information, or to discuss how this may affect you, please contact us by phone or email.