Historically, the Courts have not enforced the revenue laws of foreign jurisdictions. The rule of law, upheld in Government of India v Taylor  AC 491, was that no country enforces another country’s taxes.
However, there have been a number of developments that reverse the limitation on the collection of foreign country taxes.
Given that many people living in Australia were born overseas, have foreign citizenship or have overseas assets held in their own names, the changes have wide ranging ramifications for Australian residents. These are discussed in further detail below.
New framework relating to the recovery of tax claims
On 1 December 2012, the OECD Convention on Mutual Administrative Assistance in Tax Matters (the Convention) came into force in Australia.
The Convention provides the Commissioner of Taxation (Commissioner) with the power to seek, and the obligation to provide, administrative assistance in the exchange of taxpayer information, the recovery of tax debts and the service of documents.
Prior to the ratification of the Convention, Australia had bilateral tax treaties with a number of countries including New Zealand, France, Norway, Finland and South Africa.
Traditionally, the tax treaties did not assist governments in collecting taxes from overseas. All the treaties did was allocate taxing rights and provide for the exchange of information. Now, it seems the Commissioner can provide assistance to recover tax claims in Australia on behalf of over 35 countries which have ratified the Convention.
Article 11 of the Convention imposes on the Commissioner, amongst other things, an obligation to assist in the enforcement in Australia of the tax claims of parties to the Convention. That is, the Commissioner is obliged to recover a tax claim, as if it were its own, through domestic enforcement procedures.
The relevant domestic enforcement procedures are found at Division 263 of the Taxation Administration Act 1953 (Cth), (which came into effect from 14 September 2006). Under Division 263, the Commissioner is authorised to collect a tax debt on behalf of a foreign tax authority or take “conservancy” measures (e.g. freezing assets through garnishee or freezing orders) to ensure the collection of the debt.
The tax claim must be the subject of an instrument permitting enforcement and be uncontested. However, article 12 of the Convention imposes an obligation on the Commissioner to take conservancy measures even in cases where the tax claim is contested or is not the subject of an instrument permitting enforcement.
What could this mean for you?
An example of how this might one day affect your estate and your family is set out in the scenario below.
You have migrated to Australia from the UK, US or Europe. You have assets in your self-managed super fund in Australia. When you pass away, you also had assets back “home” too. The foreign country decides that for reasons of citizenship or domicile, your estate remains liable for inheritance tax or estate duty. The foreign country raises an assessment based on your worldwide assets, as disclosed in the Australian probate application. The foreign tax bill exceeds the assets in that country, so the foreign tax office sends a claim for the unpaid tax to the ATO. The ATO is obliged to put a caveat on the estate and freeze the superannuation death benefit which was to be paid to your estate. Your spouse and children are left in total shock.
Until recently this would have been an entirely fanciful scenario, but cases similar to this are now likely to occur in coming years.
Having said that, in the PSLA 2011/13 on “Cross border recovery of taxation debts”, the ATO has indicated that it will seek to establish a Memoranda of Understanding (MOU) with each party to the Convention. The MOU will establish the basic terms and conditions under which each taxation authority will operate when making and receiving a request for action to preserve assets or collection under the Convention. It is yet to be seen how these may impact on the recovery of tax claims by foreign tax authorities.
Due to the recent changes regarding the ability of taxation authorities of foreign states to recover tax claims in Australia, taxpayers must now realize they are operating in an era of unprecedented changes in cross-border tax collection.
Although this may assist the Australian government in combating tax avoidance and evasion by its own residents, it also means that many people living here may be liable to taxes imposed by their own country of citizenship or domicile, even if they have been here for many years.
We note that the new laws seem to raise untested legal questions.
If you or someone you know wants more information or needs help or advice on international tax matters, please contact us on 02 6247 8184 or email [email protected]