Following the easing of COVID-19 border restrictions, we have seen a steady increase in people relocating to Australia. Along with this international passenger traffic, there has been a marked increase in funds coming into the country, whether or not in connection with someone’s relocation. For tax practitioners, such relocations would ordinarily prompt thoughts of a change of tax residency and, perhaps, the CGT cost base consequences of it. But there are wider tax and other implications arising from the flow of funds that TTI members should be attuned to – see TA 2021/2, s99B applying before the person even gets here, Div 7A from foreign private companies, and more. It is fair to say that the complexity of Australia’s tax system, as it applies to flows of cross-border funds, surprises many and can readily catch both clients and practitioners unawares – especially if clients ‘forget’ that Australia taxes their worldwide income and capital gains (‘What do you mean: I need to put that in my tax return?’).
Increased ATO focus on flow of cross-border funds
Anecdotal evidence is that cash flows into Australia in recent times, especially into property investment, has increased exponentially, and the Commissioner has understandably been examining such payments (‘devoting compliance resources’) more frequently. Taxpayer Alert TA 2021/2 (TA) on purported gifts or loans from related overseas entities flagged this attention last year.
For those of us dealing with client matters, we might see things like:
- Payments received by an Australian company that is owned by an Australian resident relative of the payer, where those payments are declared as income by the company in the form of some kind of fee but the company has little substance to it.
- Payments received by individuals that are said to be gifts or loans from foreign family members.
- Payments or loans received from a foreign company.
- Payments or loans received from a foreign trust.
- Something that looks like a payment from a foreign superannuation fund.
Where the amounts received are reported as assessable income in Australia, the Australian tax concerns are lower, but we still need to be alive to transfer pricing issues, in the paying country, and also Australian tax issues when the funds are inevitably extracted from the Australian company.
Payments received that are said to be gifts or loans are the focus of TA 2021/2. Alongside that TA, the Commissioner published web guidance about the types of documentation he might expect to see, to substantiate an assertion that a receipt was not assessable, because it was a gift or loan. Not all of these are realistic.
Other issues with flow of cross-border funds
And then there’s Division 7A? Keeping it short: don’t forget that Division 7A applies to loans made by foreign companies, just as it does to loans made by resident ones.
Perhaps of most tax risk, for clients, though, is the receipt of moneys from foreign trusts. Many practitioners seem to be unaware that a payment out of the retained earnings of a foreign trust, even before a person arrives in Australia, can still be taxable in Australia. The operative provision here, section 99B of the Income Tax Assessment Act 1936, asks only whether you received a payment from a trust in an income year when you were a tax resident ‘at any time during the year of income’ before going on to provide certain limited exceptions.
A consequence of this is that an Australian tax liability will befall someone who migrated to Australia on 29 June, after having received a distribution out of a foreign trust earlier in the same financial year (say, 2 July), where that distribution was funded by earnings accumulated over the years, that the person involved was not even a resident of Australia. Unlike the usual assessing provisions, where you look principally to income earned after commencing tax residency, section 99B can subject to tax in Australia income that had been earned many years before.
Scarily for some, too, what might have been expected to be a foreign superannuation fund, might not meet the strict Australian tax definition of a ‘superannuation fund’, with the consequence that section 99B can apply to payments out of it. Had it met that definition, at a minimum, at least the balance in the fund as at the date of migration to Australia, might have been sheltered from Australian income tax. Rolling over such moneys into an Australian superannuation fund, attracts risks for the unwary, too, with non-concessional contributions caps especially relevant.
Then there is the potential, for moneys coming into Australia, being in some way the proceeds of crime. As tax practitioners, we often do not probe the source of our clients’ moneys; however, I am told that does not necessarily protect us from exposure under criminal law, if we facilitate its payment or receipt, as unlikely as we might like to think, that would be.
The opening of the borders has been associated with the inevitable flow of funds that comes with the resumption of the flow of people. As a result, those of us, who are called on to advise about, or deal with, cross-border payments may come across them more frequently, and are encouraged to consider the relevant issues carefully and to seek a second opinion if ever in doubt.
Current focus of the National SME Technical Committee
The Committee’s core purpose is to champion improvements to the tax system, for SME taxpayers, and ensuring that our work supports our members. Currently, consultation on the development and finalisation of the ATO’s draft guidance on section 100A remains a high priority, as do various aspects of Division 7A that warrant further consultation and guidance. The Committee is also working on some tools and resources for members on navigating the ATO’s final guidance on the allocation of professional practice profits. Finally, we aim to work with the government to help manage and reduce the lengthy list of announced and unenacted measures, particularly those impacting on the SME sector. These include the proposed legislative amendments to Division 7A and the small business boosts announced by the former government on 29 March 2022 as part of the Federal Budget 2022–23.
We always welcome feedback and advocacy ideas from TTI members for the Committee to consider. You can contact the Committee by emailing taxpolicy@taxinstitute.com.au.
[TaxVine No.29, 12.8.2022 – Chris Wookey, CTA, Chair of The Tax Institute’s National SME Technical Committee, looks at border security and cross-border payments.
[Tax Month – August 2022 – Previous Month, 15.8.22]