Mr Wu’s Case
Mr. Wu’s case concerned whether various cash amounts transferred from overseas to his Australian bank accounts over the 2009 to 2012 years were income derived by Mr. Wu. Most notably, as an Australian resident taxpayer, Mr. Wu is taxable on his worldwide income and it was on this basis that the ATO issued amended assessments to tax Mr. Wu on receipt of his overseas cash deposits.
Key facts regarding Mr. Wu’s circumstances:
- Mr. Gui Ping Wu is a Chinese citizen and came to Australia in February 2005. Since then, he was a resident of Australia for tax purposes, holding a State/Territory Sponsored Business Owner (Provisional) (Subclass 163) visa;
- Mr. Wu reported income from his Australian business interests in his income tax returns for the 2009, 2010, 2011 and 2012 income years but those returns did not disclose any of the cash transfers in question as income (either as income from overseas business ventures or as an interest in foreign assets);
- The ATO assessed the various deposits as income to Mr. Wu as he could not discharge the onus of showing that the funds deposited into his Australian bank accounts were not income;
- The ATO also obtained salary statements provided by Mr. Wu to HSBC in a private Australian home loan application, and used this information to amend his 2009 to 2012 assessable income in the order of the annual salary certificate (RMB2.2 million, currently about $AUD480,000). However, this was later reduced based on a revised “second certificate” produced by Mr. Wu.
Taxpayers must discharge the onus of proof against the ATO’s assessments
Mr. Wu claimed that the funds deposited across the years were not assessable income as they related to a) transfers of savings originally held in China and b) his share of profits from a business venture in China derived prior to becoming an Australian resident. Mr. Wu was unsuccessful in discharging the onus of proof in relation to his claims due to significant deficiencies in his evidence. In particular, it was noted that there was:
- No disclosure on Mr. Wu’s tax return that he owned or had an interest in assets outside Australia with a total value in excess of $50,000;
- No indication on Mr. Wu’s visa application that he had savings in China, and no evidence of documents to support that he had savings in China;
- Not a single document evidencing any aspect of his purported income from his Chinese business venture;
- A difference between the account of events given by Mr. Wu and that given in correspondence from his accountant in the course of the tax audit in relation to his purported business venture in China.
The sting in the tail – An effective tax rate of over 70% PLUS interest charges¹
Mr. Wu made false or misleading statements in his tax returns which omitted amounts of assessable income. Accordingly, the ATO made an assessment of the shortfall penalty on the basis of recklessness, warranting a rate of 50% on the tax shortfall amount.
The shortfall resulted from recklessness and points to Mr. Wu’s failure to inform his tax agent that he had foreign income, despite the agent asking on “at least two or three occasions”. He did not seek advice and consistent with his failure to inform his agent, denied both foreign assets and foreign income in his Australian tax returns.
Presumably, Mr. Wu would also have been liable for General Interest Charges and Shortfall Interest Charges on the tax shortfall amounts and penalties imposed.
Importantly, as shown in Mr. Wu’s case, penalties and interest charges may have a significant impact on the total additional tax payable.
It is worth noting that in certain circumstances, the penalty and interest charges may be remitted, in full or in part, if the ATO considers it fair and reasonable to do so. To access this concessionary treatment it is necessary to make a voluntary disclosure to the ATO.
MGD Insight – lessons to learn from Mr Wu’s case
- As an Australian tax resident you are taxable on your worldwide income and also on your gains from the sale of your worldwide assets. You are also ultimately taxable on profits and gains made by businesses outside Australia that you own and control, subject to application of a relevant DTA (Double Taxation Agreement).
- If you are moving to Australia you will become an Australian tax resident at some point in time. It is imperative that you understand when that is and that you plan to manage the implications of the ATO taxing your worldwide income and assets
- Don’t think you won’t be caught. The ATO has the power to gather information from a vast array of international sources, relevantly, information articles in our tax treaty with China and also our information exchange agreement with China. China is also a member of the Joint International Tax Shelter Information Centre (as is Australia). In addition, domestically the ATO utilises sophisticated data-matching capabilities (AUSTRAC) to track all overseas deposits to personal or business accounts in Australia.
- You have to prove you are right. Taxpayers in Australia must be able to provide evidence of all foreign transactions, for example those identified by AUSTRAC, and maintain appropriate records. The taxpayer must prove that the ATO’s assessments are incorrect.
- Disclosures made by taxpayers, such as those on income tax returns, visa applications, immigration cards, and statements to banks and third parties may be used as evidence by the ATO to conduct audits and/or to make amended assessments.
- Foreign assets >$50,000 must be disclosed on individual tax returns.
- Penalties and interest charges could more than double you tax bill. If a taxpayer is issued with an amended assessment, in addition to any tax shortfalls, liabilities may be increased significantly by interest charges and administrative penalties.
- Get sound taxation advice on your taxation residency status and the implications for your worldwide income and assets on becoming an Australian tax resident. If you have made a mistake or not disclosed foreign income and asset sales, consider the benefits of making a voluntary disclosure to the ATO.
- In light of Mr. Wu’s case, it is highly recommended that foreign persons moving to Australia obtain professional taxation advice in relation to their family group’s taxation obligations in Australia.
- Remember that the ATO has wide-reaching information collection and data-matching capabilities. Evidence obtained from various sources can be used by the ATO in a review or audit of taxpayers’ affairs. Taxpayers should ensure that their business and personal transactions can be properly supported and evidenced in the case of an audit by the ATO.
If you would like to find out more about how foreign immigrants can remain compliant and avoid substantial penalties contact a member of our International Team or call our office on +61 7 3391 5055.
¹Assuming the additional amended assessable income was taxed at top marginal tax rates of 45% and a Medicare Levy of 1.5%.
Disclaimer: This publication contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.