Many Australians end up living or working overseas as an expat for some or all of the year, at the same time as maintaining their Australian residency for tax purposes. For many, part of living or working abroad means that they have a bank account with a foreign bank.
When working overseas it makes sense to use a local bank account as it’s the most convenient method to manage your foreign salary and foreign living expenses.
Over the years, and largely due to the complexity of Australia’s tax residency rules, many Australian expats have been unsure whether they were required to declare their overseas income and the deposits that they made into their foreign bank accounts from that income.
Many simply buried their heads in the sand, adopting the view, “The ATO won’t find out about my account in this foreign country and so what the ATO doesn’t know about won’t hurt me”! As such, many Aussie expats, in the past, have deliberately not declared their foreign earnings to the ATO.
In our experience we note that this is particularly prevalent among super-yacht and cruise ship workers, Fly In Fly Out (FIFO) workers in the mining and oil and gas industries.
In these industries, particularly the super-yacht and cruise ship industry, most workers remain as tax residents of Australia, even where they may have spent many, many years overseas without setting foot in Australia!
Unfortunately for super-yacht, cruise ship and FIFO workers, remaining Australian tax residents means that they are required to declare and pay tax in Australia at high Australian tax rates on their worldwide income. Yes, that’s right. They remain taxable on their worldwide income.
Despite this, many workers in these industries, are ignorant of their Australian tax obligations (either deliberately or inadvertently) and so have failed to declare their overseas income under the misguided belief that the ATO won’t know about their overseas income as it is banked in a foreign bank account that they believe that the ATO will not know about.
Rest assured though – if you work on super-yachts, the ATO most certainly knows that most yachties bank with Standard Bank in the Isle of Mann!
If this sounds familiar to you so far, read on . . . you need to understand just what the ATO knows about you already!
Now, getting back on topic, not declaring your foreign income when you are an Australian tax resident has never been a smart option.
In the past however, due to bank secrecy laws, and poorly constructed tax information sharing agreements, it was difficult for the ATO to discover your overseas bank accounts and details of your overseas income.
But those days are now well and truly gone, thanks largely to the introduction of the OECD’s Common Reporting Standard (CRS).
Here we take a look at what the Common Reporting Standard is, how it’s being applied in Australia and what the implications are for various groups of Australian expats who spend some, or all, of their time working abroad.
The tax background to CRS for expat Australians
Australians who satisfy any one of Australia’s four residency tests remain Australian tax residents, even where they spend lengthy times outside Australia.
This is significant because Australian tax residents are required to pay tax not only on anything they earn in Australia, but also, on everything they earn abroad. In other words, Australian tax residents pay tax on their worldwide income.
This is of particular interest for “floating workers”, who may receive an overseas salary, but not actually have any roots in the location where the income is earned.
For example, crews on super-yachts in most cases remain as Australian tax residents, but work on the ocean and are paid from a foreign bank account (on the basis that the super-yacht owner isn’t an Australian tax resident).
Similarly, “fly in, fly out” (FIFO) workers, who are flown to a specific overseas location to conduct work, paid from that country and even spend most of their time there, will more often than not remain classed as Australian residents for tax purposes.
What this means is that, in addition to paying tax on ALL their earnings (both domestic and overseas), they are also obliged to pay a Medicare levy and potentially the Medicare Levy Surcharge (where they do not hold a current Australian private hospital). On the plus side, residents are allowed to take advantage of the tax free threshold but sadly this pales in comparison to the high tax rates levied on Australian tax residents.
In comparison, non-resident Australian expats are only required to pay tax on their Australian earnings (no tax free threshold is able to be claimed however).
More often than not, when it comes to your overseas salary (ignoring the tax consequences on a person’s Australian assets), it’s often more advantageous to be a non-resident for Australian taxation purposes.
As mentioned above however, many, in fact most, super-yacht workers, FIFO workers and cruise ship workers are NOT non-residents (because they do not meet the criteria for having a ‘permanent place of abode’ outside of Australia). Accordingly, most remain Australian tax residents and are required to report their worldwide income to the ATO every year.
But this is where things get messy. Many super-yacht workers, FIFO workers and cruise ship workers don’t realise this, and those that do, choose to bury their heads in the sand and deliberately do not report their income to the ATO. Many do not let the ATO know about their overseas bank accounts or the income deposited into their foreign bank accounts.
And worse, many believe that the ATO will never discover their overseas bank account!
But this simply could not be further from the truth because you need to understand that in the vast majority of cases nowadays:
The ATO already knows about your foreign bank account!
The ATO knows your overseas account number. They know the closing balance of your account, and they know every detail about every single deposit into your overseas bank account. And they’ve known about this for years (at least since 1st Jan 2017)!
How do they know? They know because in recent years the OECD banded together with a bunch of countries including Australia to create a global financial reporting standard, designed to cut through bank secrecy provisions globablly in order to combat tax avoidance and tax evasion.
That global financial reporting standard is known as the ‘Common Reporting Standard’ (CRS).
The existence of the CRS and the breadth of countries around the world that have implemented it or are in the process of implementing it, (154 countries at last count), means that there is nowhere to hide.
Hiding your overseas bank account from the ATO was never smart, but in the past it was easily done as bank secrecy laws prevented banks from sharing information about their depositors (even to foreign tax departments). Nowadays however, attempting to hide your foreign bank account from the ATO is even more stupid and dangerous than it ever was before.
The Common Reporting Standard, and the shear number of countries and banks that share bank account details of Australian expats with the Australian Taxation Office is unprecedented. And as a result you can bet your bottom dollar that the ATO already knows about your foreign bank account, about all the details of your account, about your closing balance along with all of the details of all the income that you have had paid into that account.
Background to the Common Reporting Standard
The issue of individuals avoiding taxation (either deliberately or inadvertently) by having some or all of their income paid into an overseas account is one which has rightfully concerned tax departments around the globe for decades.
As the number of people who work overseas has grown, alongside the rise in the global economy, so to have the number of undeclared foreign bank accounts, unknown to those tax departments either through wilful or negligent non-disclosure.
As a consequence over the years, there’s been an increase in tax avoidance and tax evasion, at the significant cost to each country’s local economy.
In an effort to address these growing issues, the OECD (Organisation for Economic Co-operation and Development) in 2014, created a new global financial reporting standard known as the Common Reporting Standard.
At a basic level, the CRS requires banks and financial institutions (from CRS member countries) to exchange information about accounts established by foreign persons and foreign tax residents with that person’s home country.
Important to note is that the exchange of your information is NOT dependent on a specific request from the ATO. Instead the foreign financial institution is required to exchange that information with the ATO automatically.
This is done via the AEOI (the Automatic Exchange of Information) so that your foreign bank and financial account information is sent to the Australian Taxation office automatically every single year.
Is the CRS similar to the US’s FATCA?
The CRS model is based on a similar concept which the US attempted to pursue: the 2010 Foreign Account Tax Compliance Act required non-US banking institutions to report financial information on US nationals, as well as requiring US nationals working overseas to declare their income.
At the time of writing, the US has not signed up as a party to the CRS presumably on the basis that they already had FATCA in place already, a similarly powerful foreign account reporting tool, (specifically for countries to report foreign bank accounts to the US via the Internal Revenue Service).
Which countries are in the CRS?
At the time of writing, more than 150 countries have signed up to the CRS, with more than one hundred having implemented and exchanged information with the ATO already.
With the notable exception of the USA (see below) whom adopts a similar system to CRS through FACTA, most of the larger, more developed countries are parties to the CRS and are actively exchanging information with the ATO via the CRS.
For Australia’s part, Australia in September 2014 Australia and other G20 Country government signed up a CRS implementation and in 2018 Australia started reporting and exchanging information with and receiving CRS information from other countries around the world.
Other countries that have signed up to the CRS include: notably, Switzerland (who historically have had the strictest bank secrecy provisions of all), tax-haven countries such as the Isle of Mann, Jersey, Guernsey, Cayman Islands and more.
In addition to that, all members of the OECD; China; Hong Kong; India; Russia; Canada; Chile; Sweden; many South American nations and many, many more countries around the world have signed up for the CRS and have begun exchanging information with the ATO.
Countries which have not, as yet, signed up to the automatic financial reporting standards required by CRS include: Bolivia; East Timor; Nicaragua; Sierra Leone; Zambia; Sri Lanka; Morocco; Georgia.
In general, smaller, less economically developed countries are more unlikely to have signed up to CRS. What this means for Australian nationals who wish to make use of foreign banking services to deposit their money, is that there are dwindling numbers of institutions where they can hold an account without ATO being aware of its existence.
The CRS arrangements are reciprocal, so foreign nationals seeking to open and use Australian bank accounts will also have their financial information automatically shared with their country of origin, provided it’s signed up to CRS.
To see a current list of countries signed up for the CRS take a look at the OECD’s PDF document detailing the CRS Statement of Commitments
What information is exchanged through CRS?
Firstly, I’d like to point out that although I’ve been mentioning bank and financial accounts above, it’s not just a person;s bank accounts that will be exchanged through via the Common Reporting Standard.
In addition to your bank account being reported, what will also be reported are details of any foreign financial account that you may have invested in, including foreign investment trusts, foreign corporations, non-profit making organisations and other, similar financial vehicles, all of which are required to report to the ATO.
So what exactly is included in a CSR report to the ATO?
Although reporting arrangements may vary only slightly between countries, depending on the nature of their national banking systems, in general CRS the following information will be reported to the ATO about your foreign accounts:
- information which identifies the individual, company or similar.
- your country of origin
- your full name
- your date of birth, and place of birth
- the address that the bank/financial institution has on file for you
- your tax number and/or passport details
- the closing balance of your account(s) at the end of the reporting period (ie. at the end of the calendar year)
- the jurisdiction/country where you are a tax resident
- details of every deposit, sale or acquisitions, classified into different categories of income
- details of any interest or similar income earned by you on that account
As you can see the information reported to the ATO automatically is very, very extensive.
Even where the level of detail provided to the ATO may be insufficient for the ATO to understand exactly where your money has come from or how it’s been spent, there’s clearly sufficient information for the tax office to discover major and minor, unexplained difference between the income that you declare on your tax return (or worse, have not declared) and the income that has landed in your overseas accounts.
Does the CRS report historic information?
Although the CRS provides a mountain of information to the Australian Taxation Office, it is not historic. Foreign financial institutions have only been required to report to the ATO from the date that Australia was ready to implement and exchange information via the CRS. As such, the first CRS report received by Australia covers information from 1st January 2017 onwards.
Notwithstanding that the ATO may not know about anything before that date, the ATO is in possession of enough information about you (from the 2017 CRS report) and from your history with the ATO that they will easily be able to track disparities occurring prior to 2017 and more to the point, the ATO WILL ask questions about your accounts for the earlier years. The ATO has very strong powers and legal rights that allow them to pursue you and investigate any disparity, non-disclosure or non-lodgement of your returns in earlier years (prior to 1st Jan 2017) in exactly the same way as they would any other tax irregularity.
It is important to note that Australia’s taw laws remove time limits for the review of a taxpayer’s returns and allows the Tax Commissioner to amend an assessment at any time if there has been fraud or evasion. Accordingly, if you have failed to declare your overseas income, either deliberately or inadvertently, there is nowhere to hide from the ATO as they may be able to require you to pay back taxes and hefty fines and penalties for long outstanding tax returns, and tax returns filed long after the statute of limitations has expired.
$1 Billion of funding issued to the ATO to combat tax avoidance
As you can imagine, with the implementation of the Common Reporting Standard by Australia, the ATO has received an absolute ‘gold-mine’ of tax data about Australian expats and Australian taxpayers generally. Never before has the ATO had such detailed information about each and every taxpayer and their foreign bank account. With such a mountain of data, it’s probably no surprise, that the ATO simply has not had the resources to be able to pursue every taxpayer about their foreign bank accounts.
However, that is all about to change!
Why? Well, for the observant among you, you may have noticed a curious line item in Australia’s May 2019 Federal Budget.
In that budget, the government granted the ATO, one $1 billion in additional funding (yes, additional funding) in order to combat tax avoidance.
This funding, has now allowed the ATO to dramatically ramp up its resources to wade through that gold-mine of Common Reporting Standard data in order to pursue potential financial irregularities that the CRS data has revealed, to chase up long outstanding tax returns of Australian expats and taxpayers generally and ultimately to prosecute wrongdoers.
What this means for Australian taxpayers and Aussie expats, is that you should assume that the ATO already knows everything about your foreign bank and financial accounts.
As such although it’s always been unwise for tax residents to fail to declare their foreign income, now it would be sheer madness to do so. Similarly you shouldn’t presume that just because the ATO haven’t questioned you about any of your foreign accounts before that you are in the clear and that the ATO remains unaware of their existence.
All it means is that with the mountain of data that the ATO are currently poring through, they just simply have not gotten to you yet. But rest assured, they will!
Even if your account is located in a country which has not yet signed up for the CRS (for example Belarus or the Solomon Islands), it’s only a matter of time until non-CRS countries do sign up and start implementing information, so there’ll always be a risk in the future.
I have a foreign bank account and have not declared it to the ATO. What should I do?
The first thing to do is not panic! There are all sorts of reasons, legitimate reasons why Australians have foreign bank accounts.
There’s also reasons why an Australian might not be required to report that account to the ATO on their Australian tax return, the principal reasons of which include that:
- the person may not be an Australian tax resident and therefore does not have an obligation to report their foreign income or their foreign account to Australia, or
- the person may be an Australian tax resident but they did not earn any foreign income at all and thus had nothing to report.
But what should I do? Well, firstly, you should review your residency status to confirm whether you are a tax resident of Australia or a non-resident. This is absolutely critical because if you’re a tax resident, you’ll need to report your worldwide income (including the foreign income banked into your foreign accounts) whilst if you are a non-resident, there’s no need to report your foreign income and accounts. That’s a massive difference.
So determining your residency status is critical. Once you understand your tax residency status for Australian taxation purposes, you’ll understand (from the paragraph immediately above) whether you need to report your foreign income and your foreign bank account or not.
If you’re a super-yacht worker or a cruise ship worker and you want to learn more – take a look at this: Super-yacht crew – is my income tax-free?
For other’s take a look here: Am I an Australian resident for tax purposes? 10 factors to consider.
As you may have discovered however, attempting to determine you own tax residency status is extraordinarily difficult for Australian tax purposes because the rules are ridiculously complex, very subjective and difficult because the outcome is based around your intentions and around the very specific facts and circumstances of your life.
The difficulty there is that you’re unique and as such there’s no one glove fits all approach when it comes to Australian tax residency and so determining your residency status is very, very difficult, even for professional accountants!
The danger though is that a failure to understand and apply Australia’s tax laws to your circumstances can result in major error, non-declaration of foreign income and ultimately could be very, very costly resulting in harsh fines, penalties and back taxes payable.
Accordingly if you are an Australian tax resident, and if you have outstanding tax returns, or if you have foreign bank accounts or foreign income that you have not declared, we highly recommend that you bring your taxes up to date and declare your foreign income immediately BEFORE the ATO starts pursuing you for those returns and/or that foreign income.
Why? Because rest assured that if the ATO start pursuing you, they will levy substantial fines and penalties upon you and it will be near on impossible for you to avoid those penalties.
By getting your long outstanding tax returns prepared before the ATO start pursuing you, we have an excellent chance of having all fines, penalties and interest reduced to nil because the ATO are happy to work with taxpayers who take their responsibilities seriously, even where that taxpayer has made mistakes. If the you voluntarily takes responsibility, declare the income and fix your oversights before the ATO gets to you, they will be happy to work with you and assist you be reducing their fines and penalties to nil, versus working with an antagonistic taxpayer who fails to take responsibility. The latter of which will be penalised like no tomorrow!
Are you confused about your residency status? If so, take a breath . . . our team are here to help
Speak to an Australian expatriate tax specialist today
If you’re an expat or you’re planning to become an expat soon, you probably already know that residency is unfortunately overly complex. You’ll also likely know that as there’s such a disparity in how residents are taxed (on worldwide income) versus non-residents (only on Australian source income), getting it wrong can be very costly.
This, understanding your residency status is critically important.
If you’re confused about Australia’s complex residency rules and you can’t work out whether you’re a non-resident for Australian taxation purposes or not, we highly recommend that you set aside some time and book a “Residency – Am I a resident of Australia for Australian taxation purposes” tax consultation with one of our tax specialists in order to get to the bottom of the issue and put your mind at ease.
Book your Australian tax residency consultation today
Simply fill out our booking form (below) and choose the “Residency – Am I an Australian tax resident” consultation (our most popular appointment), with us and our team will have your tax residency issues sorted in no time.
Please note: To simplify the booking process, the available appointment times (listed above) will be displayed in your timezone, not ours!
What will we discuss in our residency consultation?
When you book a residency consultation with us, the agenda is flexible and can be adjusted to suit your needs.
Some of the topics that you can expect us to cover will include the following:
- your circumstances as an Australian expat or potential expat (if you’re considering a role overseas)
- whether or not you are likely to be deemed a resident or non-resident for Australian taxation purposes based on those circumstances,
- tax traps and the taxation consequence of your residency status relating to the income that you earn and the assets that you own,
- potential tax planning opportunities available to you based on our opinion of your residency status, and
- recent legislative changes relevant to non-residents (e.g. CGT changes for Australian property, HECS/HELP debt reporting obligations, Foreign resident CGT Withholding legislation etc),
- we’ll discuss and answer any questions that you both may have.
As you can see, there’s a lot to consider. If you’re thinking of moving overseas, be sure to book a ‘Residency’ tax consultation with our team or a similarly experienced expatriate tax firm today.
We’ll be able to step you through the issues so that you’ll be able to minimise your taxes, maximise your wealth, and take advantage of all the various tax opportunities that are available whilst minimising the risks!
Get in touch with our Expat Tax Services team today!