Are Foreign Tax Grabs a Possibility?

Historically, the Courts have not enforced the revenue laws of foreign jurisdictions. The rule of law, upheld in Government of India v Taylor [1955] 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.

Conclusion

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].

Choosing a Business Structure

There are 4 main types of business structures for doing business in Australia, each with their own advantages and disadvantages. A person can carry on business as a sole trader, or in partnership, or through a trust or company or through a combination of them.

The choice of business structure is an important decision to make at the start of a business venture, as the structure will have administrative and tax implications and reporting requirements during the lifetime of the business. When setting up a business structure, consideration should be given to factors such as how many people will be involved in the business, what the business will do, how much income is likely to be earned from the business and the intended growth of the business.

Sole Trader

A person can carry on a business on his or her own behalf, as a sole trader. A sole trader can trade under his or her own name or a registered business name. The income earned as a sole trader is taxed at the same rate as individual tax payers.

This is the simplest form of business structure, with lower establishment costs and with minimal legal and compliance requirements. The main disadvantage to this type of business structure is that a sole trader is personally liable for all obligations incurred in the course of the business.

Partnership

Two or more individuals can carry on business in partnership, where the income from the business is received jointly. Partnerships are relatively inexpensive to form and operate. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partners. A partnership itself is not taxable, rather each partner pays tax on their share of the net income of the partnership.

The downside to this type of business structure is that partners are severally and jointly liable for the obligations of the partnership. There is also potential for dispute and loss of trust between the partners.

Trust

Under a trust, a trustee owns the property or assets of the trust and carries on the business on behalf of the beneficiaries of the trust. A trustee can be an individual or a company. A formal Deed is required to set up a trust and there are annual tasks for a trustee to undertake. As such, it can be expensive and complicated to set up and administer a trust.

The advantages of a trust are that there is flexibility in income distribution and income can be streamed to low income tax beneficiaries to take advantage of their lower marginal tax rate. Furthermore, assets can be protected through a properly drafted Deed. The disadvantages are that trusts can be costly to set up and there are more compliance and legal requirements.

Company

A company is a separate legal entity capable of holding assets in its own name. The words “Pty Ltd” after a business name show that the business is a registered legal entity trading in its own right. A company is owned by shareholders and directors manage the company’s day to day business and affairs. The shareholders of a company receive any company profits in the form of dividends. Shareholders can limit their personal liability and are not generally liable for the company debts. Instead, the financial liability of the company is limited to the company assets, though directors may become personally liable for company debts (including various tax debts) in certain circumstances..

Companies are governed by the Corporations Law and there are a number of duties and obligations for company directors. Primarily, directors have an obligation to act in the best interests of the company. Establishment of a company and ongoing administrative and compliance costs associated with the Corporations Law can be high. There is also a requirement to publicly disclose key information.

Conclusion

Each business will vary and no business owners’ circumstances will be the same. It is advisable to talk to both an accountant and solicitor about the costs and risks of each business structure to make sure that the business structure used is right for your business and your needs going forward.  Sometimes it is necessary to review a business structure to ensure it still delivers the outcomes you wish.

If you or someone you know wants more information or needs help or advice, please contact us on 02 6247 8184 or email [email protected].

Making Your Will Count – Healthy Will Checklist

It is important for everyone over 18 to have a Will to make sure their wishes are followed and their assets are distributed as they would want after they die.

If you don’t have a Will your assets will be divided according to how the law dictates in the rules of intestacy, that is, when you have not made a Will.  If you die intestate it is very likely that your estate will not be distributed as you would have desired.

A Will is also the place where you can indicate to your family and friends your wishes on other important matters, such as who you want to be the guardians of your children.

Making a Will shows a level of care in not wanting to give loved ones any more stress to deal with than they will already face when you pass away.  In many ways it is one of the most selfless things you can do.

Regularly review your Will

Preparing a Will is not a once-off event. It is sensible to review your Will regularly, and we suggest that this be done a minimum of every three to five years.

Changes in your life may create problems for others in interpreting your wishes in any Will you have already made and may undo all the good work you have done to protect those close to you by making one.  A change in life can make your Will ineffective or even invalid.

It could be that a Will made many years ago is still appropriate, just as it may be that a recently made Will is now out of date.

Ideally you should review your Will annually, along with other annual events, such as lodging your taxation returns. It is likely that your needs and circumstances will change many times in the course of your life and with those changes it is prudent to consider your Will.

Healthy Will checklist

There are a number of life events that can impact on your Will and which mean you need to revisit and update it.

Here is a checklist of life changes which can impact on the validity of your Will and which you need to consider in examining the legal health of your existing Will.

  • Have you married? Or separated from your partner?
  • Have you had any children?
  • Have your adult children entered a business or profession or married or had children themselves?
  • Is the person you named as executor, to carry out the wishes in your Will, still alive and well enough to do the job?
  • Have the circumstances of any beneficiaries changed to make you reconsider your wishes, or have any of them died?
  • Have you nominated any specific gifts that are no longer valid or don’t exist, for example, have you sold a property that you had left to someone in the Will?
  • Have you acquired any new assets that you would want to make specific plans for in your Will?

Superannuation

At the same time as you check the health of your Will, you need to check your super and life insurance, which is often now a part of your super policy.

Many people assume their superannuation will be divided up in accordance with the wishes in their Will, but that is not necessarily – or even usually – the case. You need to look at your superannuation documents to check how you have nominated that your superannuation benefits should be allocated, and that it is still allocated in the way you want.  If you have a self-managed superannuation fund (SMSF), it is very important to plan for its control and for death benefits or pensions.

At the same time, check the division of any life insurance you have in your policy, and update it if necessary.

Conclusion

The important thing is to consider your circumstances at every major personal milestone in your life.

Any Will you have made is likely to become out of date and no longer accurately represent your wishes in some way following changes in your life, possibly within a few years of drawing it up. It will depend on circumstances that are unique to you.

If you would like to discuss a new Will or changes in your circumstances or your SMSF documentation and would like a review of your current Will or SMSF documentation please call us on 02 6247 8184 or email [email protected].