The Australian Taxation Office (ATO) is currently targeting foreign funds transfers.
Individuals need to be aware of their rights and responsibilities in order to discharge their Australian tax obligations efficiently and appropriately.
Foreign income includes business income, foreign employment income, pensions and annuities, bank interest, dividends, royalties, rent, capital gains and personal services income.
The ATO defines foreign income as:
- any income earned, derived or received from sources outside Australia
- a periodical payment by way of gifts or allowances from a source outside Australia
- a periodical benefit by way of gifts or allowances from a source outside Australia
- Provided that this amount has neither been included in your taxable income, nor received in the form of a fringe benefit.*
Types of target foreign income you need to show in your tax return include the following:
- regular receipts of money and gifts from relatives living overseas which are exempt from Australian tax
- income from foreign business interests and investments, which are exempt from Australian tax, including income received by migrants with business interests in their country of origin
- foreign source income received while you were a temporary resident that is exempt from Australian tax
- the amount of exempt foreign employment income.
The most important thing to remember is that you only have 28 days to respond to an ATO information request regarding the nature and source of funds. If you don’t respond within the 28 days, the ATO will likely issue an amended assessment including the funds in the assessable income for the relevant year and subjecting it to tax.
There have been instances where the ATO information requests were sent to an old address or they were sent while the person might be away from Australia. If there is no response within 28 days, the funds are treated as assessable income automatically and the ATO will issue an amended assessment or default assessment. This is quite a short time frame if you are trying to gather evidence that certain funds shouldn’t be considered taxable income.
There are a number of steps that people can take to ensure they are in the best position to prove the source and determine the treatment of funds from an income tax perspective.
These steps include:
- if you transfer funds into Australia, know and keep evidence of the source of the funds
- while travelling keep track of your mail box/PO box. If you receive an information request from the ATO and do not respond there will be a greater cost to rectify the situation
- get your tax advisor or accountant to help so you understand your position before you respond to the ATO. In particular, make sure you understand your residency status from a tax perspective.
There needs to be a lot more education around the Australian tax system for migrants. This would help remedy some of the issues people are experiencing when it comes to the taxation of funds transfers.
Individuals need to be proactive in keeping up to date with the ATO’s stance on foreign income and ensure they are doing the right thing. Importantly, if they are unsure they should seek expert advice to avoid issues with taxation in the longer term.