Update: Article updated 16th Nov 2018 with thanks to Anthony FitzGerald who correctly pointed out that the OECD currently contains 34 member countries.
Overdue Australian Tax Returns? You’ll Need to Bring Your Tax Returns Up to Date . . . and soon!
If you’re an Australian expat that hasn’t lodge a tax return for years (if at all) since living and working overseas, or if you’re under the mistaken assumption that you do not need to lodge a tax return (wrong btw…take a read my earlier article “Do I need to lodge a tax return while living overseas?” to learn more), then your days may finally be numbered as the ATO are coming for you.
Traditionally, the ATO haven’t been very proactive, nor very good at chasing Aussie expats for overdue tax returns in the past. The reason for that is because although the ATO would have know where you landed overseas (from your passport records), they didn’t necessarily know your address, where you’d moved to specifically, or how to contact you.
Although Australia’s tax information sharing agreements allow the ATO to discover information about you from overseas, under those agreements, the ATO couldn’t simply go on a fishing expedition and ask what information the other country has on you. Instead, to request information, the ATO needed to have some concrete reason for requesting information.
But, with the introduction of new initiative known as the Common Reporting Standard, requiring local and foreign banks to report information to the ATO, and aimed at combatting tax avoidance, and led by OECD member countries, including Australia, all that is about to change.
In fact it has already changed! Why? Because the ATO, a couple of months ago received their first Common Reporting Standard report (on 31st July 2018) comprising of information about your overseas accounts, overseas income, and various other details.
Whilst the ATO are sifting through mountains of detailed financial data, the result is that they now know a lot more information about, than you realise and than they ever had access to before!
With that in mind, we’ve been advising clients and potential clients for over 12 months, that armed with that information, we would foresee increased compliance and enforcement efforts from the ATO for clients with overdue tax returns. And sadly that is exactly the case, with news today (), that the ATO intends to do exactly that!
So, armed with an unprecedented amount of current information about you, it will be a lot easier for the ATO to be able to find you (where they couldn’t before), and they’ll be able to demand that your returns be brought up to date immediately.
The Window Of Opportunity to Bring Your Returns up to date is Rapidly Closing
So clearly, the timeframes to bring your Australian taxes up to date before the ATO levies hefty penalties (of up to $1,050 per return plus interest penalties) are rapidly diminishing. To avoid penalties, on your outstanding returns, we strongly urge you to act fast to bring your Australian taxes up to date before the ATO swings the hammer down by hitting you with harsh fines and penalties.
Introducing the Common Reporting Standard and What Information is Reported to the ATO
Quite often we are asked, what exactly is the Common Reporting Standard and what information are banks around the world now required to report to the ATO. To answer those questions, we need to take a step back and understand the background behind this initiative.
So, inspired by the USA’s introduction of the Foreign Account Tax Compliance Act (FATCA), requiring foreign banks to report back to the Internal Revenue Service (IRS) and the US government when the bank holds an account for a US citizen, Australia along with most other OECD member states, undertook to create an initiative that was broadly similar to FATCA and that introduced similar rules, namely the Common Reporting Standard (CSR).
In short the Common Reporting Standard seeks to do for OECD member countries like Australia, what FATCA does for the IRS and the USA. The Common Reporting Standard Places an obligation on the majority of banks around the world to report information about Australian expats, Australian tax residents and Australian citizens to the ATO.
All across the world, governments have been desperately searching for ways to shore up extra tax revenue and to combat tax evasion. By introducing the Common Reporting Standard, OECD member countries like Australia, now have unprecedented access to financial and banking information than ever before.
In simple terms, the CSR enables prosperous countries like Australia to obtain information from financial institutions. This information can then be exchanged with other nations in an effort to increase tax transparency and do everything possible to prevent tax evasion.
As at the time of writing (November 2018), all 34 OECD member countries plus a further 115 countries in various other jurisdictions have signed up to implement the Common Reporting Standard agreement.
Of the 149 countries that have agreed to implement the Common Reporting Standard, as at the date of writing, 102 jurisdictions are already exchanging information with a further 5 more due to begin reporting in 2019. 42 other countries who have signed up and agreed to share information are yet to set a start date, but are expected to also begin reporting sooner rather than later.
So, with the background to Common Reporting Standard laid out for you, this article has been written to serve multiple purposes.
First, it seeks to explain precisely what the Common Reporting Standard (CRS) is, why it’s being implemented and when.
Second, it details which other countries (along with Australia) are implementing the CRS and the proposed timeframes.
Third, it explains exactly what information foreign banks and financial institutions are required to report to the Australian Tax Office and to the tax departments of each other jurisdiction that has agreed to participate and share information via the Common Reporting Standard.
Finally, the article explains precisely what this will mean for Australian expats and citizens with foreign accounts and investments. And, as an expat, how it will affect your taxes.
What exactly is the Common Reporting Standard?
The Common Reporting Standard is the universally excepted standard used for the collection, exchange and reporting of the financial information of foreign expats.
The CRS is an arrangement which enables banks and other financial institutions to collect and report the financial account (i.e. bank accounts, savings accounts, etc.) information of expats to the Australian Tax Office.
In exchange, the Australian Tax Office receives the financial account information of Aussie expats from the tax authorities of other nations. This agreement helps to ensure that Australian residents who have bank accounts in other countries are compliant with Australian tax laws and discourages tax evasion.
Why is the CRS being introduced?
Over the past decade, demand for standardised tax reporting on an international scale has dramatically increased. In response, the US implemented the Foreign Account Tax Compliance Act (FACTA) in 2010, in an effort to eliminate tax evasion by citizens and expats.
By 2014, the Organisation for Economic Development established the “global FACTA”, also known as the CRS. The CRS was enacted in response to a request from the G20. The goal is to ensure unprecedented levels of account information are exchanged between partnering national governments, to prevent tax evasion, end banking secrecy and stop the “leakage” of tax to other jurisdictions.
When does the CRS begin? – A total of 101 separate jurisdictions have agreed to implement the G20’s CRS recommendations. These jurisdictions agreed to automatically exchange information from 2018.
Initially, 54 jurisdictions agreed to automatically share their 2016 information from June 30th, 2016. Following this, the remaining 47 jurisdictions committed to reporting their CRS information from 2018.
Overview of Australian CRS implementation timeframe
Below is Australia’s CRS implementation timeframe, outlining events and expected launch dates.
- Cut-off date for new and pre-existing accounts: June 30th, 2017
- Due diligence requirements come into effect: July 1st, 2017
- First review of pre-existing individual accounts of high value is completed: 31st July 2018
- First review of pre-existing individual accounts of low value is completed: 31st July 2019
- First review of pre-existing entity accounts is completed: 31st July 2018
- First report of reportable accounts is issued to the ATO: 31st July 2018
- First exchange of reportable accounts is conducted with exchange partners: 30th September 2018
Which other countries are implementing the Common Reporting Standard?
In addition to Australia, there are many other countries which plan to, or already have implemented the Common Reporting Standard. Here is an overview of these CRS-compliant nations, and the timeframes the agreement will come into effect.
United Kingdom – An early adopter of the Common Reporting Standard, UK tax residents with international wealth planning structures must watch these new reporting requirements closely. With careful planning, UK tax residents can protect their wealth while complying with the rules. CRS reporting commences in September, 2017.
China – To ensure compliance with the CRS, Chinese expats need to organise their financial affairs. The CRS reporting period begins in September, 2018.
Germany – A key driver of CRS, Germany was one of the first countries to implement it. Information was first reported to CRS partners in September, 2017.
Italy – Though enacted in January, 2017, specific rules regarding the CRS have not be enforced.
Spain – Spain began reporting to its CRS partners in September, 2017.
Belgium – The CRS was introduced in the wake of various high-profile financial scandals. As such, the reporting period began in September, 2017.
Canada – Canada introduced the CRS, to expand upon FACTA reporting. CRS reporting started in September, 2018.
Guernsey – Guernsey began reporting under the US’s FACTA and the UK’s CDOT arrangements, which were replaced by the CRS. Reporting to partners began in September, 2017.
Hong Kong – CRS legislation was introduced in Hong Kong in June, 2016. The first report to CRS partners occurred in September, 2018.
India – The CRS was adopted to counter the BEPS in August, 2015. Reporting to partners began in September, 2017.
Jersey – Jersey has been reporting under the US’s FACTA and the UK’s CDOT, since 2015. They began CRS reporting in September, 2017.
Mexico – Mexico started sending CRS information to its partners in September, 2017.
Netherlands – CRS rules came into effect as of January 1st, 2016. And the Netherlands commenced providing financial information to CRS-compliant jurisdictions from September, 2017.
New Zealand – New Zealand’s financial institutions and banks began gathering CRS information from July, 2017. The first report took place in September, 2018.
Poland – After working on internal provision for CRS implementation, it was brought into force in May, 2017. Poland’s first report to CRS partners took place in September, 2017.
Singapore – Since approving the CRS, Singapore began reporting with its partners (including: Australia, Japan, South Korea, UK, South Africa, Italy, Norway, Canada and Finland) in September, 2018.
South Africa – Swiftly adopting and implementing the CRS into national law, South Africa started reporting to CRS partners in September, 2017.
United Arab Emirates – The United Arab Emirates started automatically exchanging the details of expats in 2018, with reporting commencing in September.
What information does the ATO require?
Under the CRS arrangement, banks and financial institutions are obligated to report certain information to the ATO. This includes:
- The tax payer’s name, date and place of birth, and tax file number
- The address of the taxpayer
- The name of the overseas financial institution and the account number associated with the account
- The current balance of the account, as of the date of closing or at the end of the reporting period, and
- The details of all income deposited into the account during the reporting period
Please be advised that your financial institution may be required to report more than the above information. What they report to the ATO will depend on the reportable account. For instance, if you have a depository account, its total gross interest paid or credited during the calendar year must be stated.
If you hold a custodial account, for example, the information that must be reported to the ATO includes: the total gross dividends and a total gross of any other income accrued regarding the assets held in the account.
If no foreign accounts are held, a nil report is not necessary, but it can be submitted.
Also, due diligence requirements differ for accounts existing before July 1st, 2017 and for new accounts created on or after July 1st, 2017. These requirements also depend on the account’s value and whether the account belongs to an individual or an entity.
What does this mean for Aussie expats and Australians with foreign accounts/investments?
As Australia has already adopted the Common Reporting Standard, expats must understand their obligations. Banks and financial institutions are already collecting account information and so Australian expats and resident Australian taxpayers, with foreign bank accounts should assume that the ATO already knows the details of their foreign income and accounts.
So with that in mind, expats will need to organise their financial affairs with the ATO and the tax jurisdiction where they live and work, by ensuring that they declare their foreign bank accounts, any income earned and any assets held overseas. Non-compliance could result in serious financial and reputational risks.
If you are an expat classified as a “tax resident” (i.e. paying taxes outside the country where you usually bank), there are a few things you must be aware of in the wake of Australia’s CRS adoption.
Your bank will hand over your personal account information to the Australian Taxation Office this information will be shared with annually with the tax authority where you are a tax resident. And, if you are an expat located in a ‘revenue hungry’ country, as an expat, your individual accounts, interest, dividends and other income earned outside of that country (i.e. “tax residence”) are likely to be investigated.
How does this impact an expat’s taxes (in Australia and abroad)?
Those most likely to be impacted by Australia’s adoption of CRS rules are expats and those who hold investments in different jurisdictions (such as foreign investments and property ownership).
The degree to which an expat is affected by the CRS will vary, depending on the bank accounts and investments they hold, where they live, whether the expat in question is running a business, among other factors.
With the adoption of the CRS by various OECD member countries around the world, offshore tax planning and wealth management are directly associated with tax evasion. As a result, if you do not comply you risk substantial fines and reputational damage.
Under the CRS, your account information will be automatically exchanged with CRS-compliant countries, regardless of whether you have disobeyed the rules. According it is critical that you ensure that relevant documentation (i.e. self-certification forms) and details of your foreign earnings, foreign accounts etc are completed, so your information can be reported to the appropriate tax authority, and matched to your tax records.
Common Reporting Standard rules can be difficult to navigate. If you’re an Aussie expat with outstanding tax returns, we highly urge you to use this small window of opportunity (before the ATO finishes sifting through their first Common Reporting Standard report) to bring your tax returns up to date.
And if you need help preparing your Australian expat tax return, simply follow this link to book a FREE “General Enquiry” appointment with our team to learn more.