Pandora Papers - The Tax Nerd’s view

07 October 2021

This article originally appeared in The Sydney Morning Herald, The Age, and Brisbane Times on 6 Oct 21. 

It’s that time where tax practitioners at barbecues start to consider what ‘alternative’ careers to tell people they practice. Another leak of information from euphemistically named ‘international finance hubs’ raises the public’s ire at those of us who are the gatekeepers to the complex world of tax, leading us to seek the cover of more acceptable professions.

Caution is required however. The Pandora Papers raise two related issues which are often confused – transparency about the ownership of Australian assets by non-residents, and disclosure by Australian residents of assets held overseas. These two issues have very different effects for the Australian tax base.

As our tax laws are currently drafted, non-residents holding passive investments generally only have to pay Australian income tax on interests in Australian real estate. Australia’s tax system is well designed to capture tax due on such investments, by way of tax on rents earned and gains on eventual sale. The mischief from a lack of transparency in relation to foreign ownership is not one of tax. Whether Australia’s anti-money laundering rules need to be strengthened is a topic that experts in trans-national crime should comment on.

By comparison Australian residents who hold assets offshore have obligations under the existing tax laws to disclose those holdings in their Australian income tax returns. Australia has comprehensive ‘attribution’ tax provisions that bring to tax in Australia much of the passive income earned by offshore entities controlled by Australians. Control in this sense includes de facto control - where someone else looks like they control the entity, but they are really acting for your benefit. The attribution taxation laws can also extend to income earned by entities where cash, assets or services were transferred to them for less than market value consideration.

Questions about these matters are included in each year’s income tax return. In particular, every Australian who lodges a return is required to declare whether they have interests in $50,000 or more of assets offshore, and whether they have ever transferred cash, assets or services to an offshore entity. So anyone who has such holdings, but doesn’t declare them, is telling lies in their tax return. That is serious stuff.

This is where the Australian Taxation Office (ATO) will be most interested in the Pandora Papers. The ATO has extremely extensive powers – more extensive in many respects than other law enforcement bodies. If the ATO finds offshore entities or wealth that the Australian controllers have not declared, it will generally deem all of the income from those investments to be taxable in Australia. Assessments will be issued on that basis, requiring immediate payment. Where a taxpayer has committed fraud or evasion – such as by telling lies on their income tax return - there is no time limit on the ATO’s ability to do this. The taxpayer has to do all the work to prove why the amounts are not income or why the lies told in their return did not constitute tax evasion. That is usually very hard.

In relation to the Australian income tax base, the existence of undisclosed offshore assets does not reflect a lack of legislation or a lack of ATO power. What it does reflect is potentially unlawful behaviour that has now been brought to the ATO’s attention. Australians with such undisclosed assets should seriously consider making a clean breast to the ATO before the ATO comes to visit.

As for me? If anyone at the barbecue asks, I’m just a humble landscape gardener.

Keep up to date with changes to Australia's Tax landscape:

BDO's Tax Tech Updates