The Australian Taxation Office’s (ATO) voluntary disclosure program for omitted offshore income came to an end on 30 June. Under that program, in exchange for a full and material disclosure the Commissioner of Taxation offered a fixed penalty rate of 10%, interest reductions and an assurance of certainty on whether those making the disclosure will be referred for investigation for a potential breach of the criminal law. The underlying theme of the program was an implied assurance by the Commissioner that in circumstances of a non-serious nature a criminal referral would not be made.
The ATO has issued several warnings that from 1 July 2010 it will be increasing its audit activity to target Australians and Australian entities with offshore income and assets.
The ATO has progressively strengthened its ability to collect information on Australian individuals and entities with income and assets “hidden” offshore. It is reported that the ATO is also able to accurately trace the flow of funds through complicated international structures and banks. This is made possible by increased powers to exchange information with other countries, financial institutions and the Australian Transaction Reports and Analysis Centre (AUSTRAC).
The Commissioner has also warned that where omitted offshore income, capital gains and over-claimed deductions are uncovered as a result of a tax audit the penalty rate may be as high as 90%. In serious cases the Commissioner has warned that the ATO will seek criminal prosecutions. Recently, in two unrelated cases, two Queensland businessmen were sentenced to over six years jail for over-claiming deductions to a tax value of $2.2 million and a director of a small business in New South Wales was sentenced to two and half years jail for overstating deductions with the use of fabricated invoices and sending money tax-free to an overseas controlled bank account to a total tax value of $180,464.
The prosecutions resulted from an investigation undertaken by the ATO’s Project Wickenby Taskforce (an investigation into tax havens used by the wealthy) and are a demonstration of the ATO’s determination to prosecute serious cases.
To effectively manage the risk of omitted offshore income, capital gains and over-claimed deductions, one should undertake a thorough investigation of their affairs. If a risk is identified, the safest course of action is to seek tax advice to consider the legal position, the merits of a full written disclosure and settlement opportunities. Although the benefits provided by the offshore disclosure program are no longer available, an early and carefully managed disclosure will still, in our view, maximise the opportunities to reduce the penalty rate to as low as 5% in certain cases and seek a remission of interest charges.
An early disclosure will also assist in managing the risk of a criminal investigation.
Once a taxpayer is notified of an audit, the opportunity to access a lower penalty rate is significantly reduced. Negotiating a suitable settlement of the tax debt and managing the risk of a criminal investigation also becomes more difficult because the person or entity being investigated is ‘caught on the back foot’. Nonetheless, once an investigation or audit commences, it is recommended that tax advice is sought to quantify the risks and to open the communication channels with the ATO if it is necessary to manage the risks.
The tables below demonstrate the contrast in penalty rates that are applied by reference to the culpability of a taxpayer:
If a full disclosure is made before an audit commences
If a full disclosure is made after an audit commences
For more information on anything in this article or related topics please contact the author:
Pratheepan Balasubramaniam
Associate
03 9611 0135
prathb@harwoodandrews.com.au