Much like a childhood game of hide’n’seek, where the boundaries always seem to be pushed (just a little!), occasionally taxpayers might be tempted to “hide” or “relocate” taxable assets, in order to avoid paying additional tax in their home country. But with information being shared across borders and more ways of gathering information, tax-avoiders are going to find it increasingly difficult to bend the rules.
Big brother is watching
The Australian Government has access to many channels of information. We’ve moved beyond simple statements from banks and financial institutions; data-processing and data-matching capabilities make it possible to draw incredibly detailed connections and lines between the activities of taxpayers.
The data comes not only from governmental departments but also from external institutions. You may not notice when you register a property or vehicle, collect a social benefit or purchase an asset, but all of the information provided helps to build a profile of individual taxpayer activity. It is unsurprising – we know it’s happening – but what we don’t know is how and when this incredible array of data will be used.
A new standard of sharing
Predictably, other Governments across the OECD and beyond are using similar methods to understand the activity of their taxpayers.
In 2010 the USA instigated the Foreign Account Tax Compliance Act (FACTA), which made it a federal law for US citizens, including those living outside the US, to file yearly reports on their international accounts and interests. The act gave every financial institution and trust in the world the obligation to provide information about US owners or beneficiaries of investments. Motivated by their US counterparts, the rest of the world is following suit, keen to gather the details of their own citizens with international financial interests.
The Automatic Exchange of Information (AEOI) agreement is a single global AEOI standard for financial account information. As of September 2018, without having to send a specific request, around 100 countries will send and receive pre-agreed information each year to reduce the possibility of tax evasion. The agreement covers the financial account required, the types of accounts and taxpayers as well as the gathering procedures to be followed. It’s not just about cracking down on tax evasion; the new global standards aim to increase the transparency and accountability of financial institutions and governments globally.
The rollout
This AEOI process is already underway, with the gradual rolling out of a Common Reporting Standard (CRS) for various forms of income, in each of the participating countries. The full extent of data collection and sharing is expected by September 2018.
While the standards aim to minimise tax evasion and the costs to governments, the degree of compliance costs is unknown. Global financial transparency doesn’t come cheap. Similar regimes like Anti-money Laundering or FACTA, however necessary, have come with a high level of complexity and a cost that reaches far beyond the targets of the strategies. While all countries are invited to join the standards, some developing countries will simply not have the resources to participate.
What does it mean for your investments?
Those with taxable assets such as property, shares, investments, superannuation funds, mortgages, credit cards, beneficial rights under trusts or estates, or other entities outside of Australia should assume that the asset will soon be found. Location at this stage is almost irrelevant, with even so-called tax havens providing the much-needed AEOI information. For those deliberately, or unintentionally hiding assets, the world is inevitably set to become a much smaller place.
Experience tells us is that revenue authorities are more pragmatic and at times concessionary, when matters are disclosed to them voluntarily, rather than uncovered by investigation or review. As AEOI processes and protocols are put in place, now is the time to take a look at your personal or businesses investments and determine whether international assets need to be pre-emptively declared to Australian tax authorities.
Scott Mason, Managing Partner – Tax Advisory (Australasia), Crowe Horwath/Findex
