Publications

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When offering amnesties and settlement offers, the Australian Taxation Office (ATO) walks the line between collecting revenue and pursuing tax evaders for criminal activity.

A new offer announced on November 30, 2009, and expiring June 30, 2010 seems, on paper, to strike just the right balance. It offers tax evaders a choice between remaining in hiding and thereby delaying or perhaps even eluding arrest and prison time, or cooperating with the authorities in exchange for the promise of a reduced penalty.

Over the last few years, tax authorities around the world, including in Australia, have employed similar tactics to curb tax evasion premised on taxpayers hiding funds in foreign tax havens, and overseas this strategy has had quite some success. But will the ATO offer be enough to entice Australian wrongdoers from their hiding holes?

Zero Tolerance, with Incentives

Clearly, the first step in flushing out wrongdoers is a megaphone announcement, along the lines of "We have you surrounded." Of course, it does help to have the culprit actually surrounded. The non-disclosure world is shrinking and the spate of agreements with tax havens for disclosure of information is surely tightening the noose on wrongdoers and surrounding them with potential allies of the ATO. And, in a recent media release, Assistant Treasurer the Hon. Nick Sherry not only talked tough but reiterated that the new offer contains a carrot too: "The Rudd Government has a zero tolerance to tax evasion – so we're pursuing a two-pronged strategy of incentivising voluntary disclosures on the one-hand, and cracking down hard where people don't fix the record."

Australia has, for several years, had a general Voluntary Disclosure Initiative (discussed in ATO Practice Statement PS LA 2006/2) through which taxpayers can approach the ATO to disclose prior omissions or misrepresentations concerning their tax liabilities in return for possible clemency. However, with the growing incidence of tax evasion involving foreign tax havens, in June 2007, the ATO introduced Australia’s first Voluntary Disclosure Initiative designed specifically to entice taxpayers holding funds offshore to come clean to the ATO in consideration for reduced tax shortfall penalties and general interest charges, but only if taxpayers made full and true disclosures.

Over the last two years, the ATO has received some 3,028 disclosures declaring an additional $306 million, from which $65 million in tax was raised.

New Offer Expires June 30

The new initiative modifies its 2007 counterpart, which ceased on November 30, 2009. Also important is the cutoff date, June 30, 2010. Samuel Johnson once said that “nothing focuses the mind like a hanging” and this cutoff date is expected to have that effect. This cutoff is a big stick but comes with some attractive carrots: for those who respond in a timely way, reduced penalties and the suggestion that if the only crime is failure to disclose income, the ATO will not proceed to investigate the tax offenses that may have been committed.

Taxpayers that make an offshore voluntary disclosure which results in a declaration of additional income of $20,000 or less in tax per year will still not have to pay a shortfall penalty for that year. However, if a taxpayer's additional taxable income exceeds $20,000 in any tax year, the shortfall penalty will be remitted to 10 percent of the additional tax for that year. This represents a 5 percent increase to the penalty rate that applied to voluntary disclosures made before November 30, 2009 under the old initiative. Shortfall penalties ordinarily range between 25 percent and 75 percent, depending on the level of disregard the taxpayer has shown for the tax law.

Also, the general interest charge will continue to be nil for the tax years up to and including the 2002 tax year. The general interest charge will be reduced to the base rate for the 2003 and 2004 tax years. Shortfall interest charge continues to apply for 2005 and later years at the normal rates.

Balancing the raising of revenue, and the carrots to be offered for this, with proper tax administration means a line has to be drawn and a big stick has to be taken to some people. Hence, the following taxpayers continue to be ineligible for the benefits offered by the initiative:

(a) taxpayers that are already being audited by the ATO or who have received a notice from the ATO requiring disclosure of omitted foreign income or over-claimed deductions;

(b) taxpayers whose foreign income was derived from a breach of criminal law (e.g., drug trafficking);

(c) taxpayers who were promoters of, or otherwise encouraged other taxpayers, to participate in a tax evasion scheme; and

(d) taxpayers already under investigation by the ATO, Australian Federal Police or Australian Crime Commission.

Initiative Includes New “No-names” Disclosure Procedure

A new feature of the initiative is that taxpayers now have an opportunity to make a voluntary disclosure on an anonymous or “no-names” basis and receive, via their advisers, an indication from the ATO of whether or not the ATO is likely to pursue a criminal investigation if the taxpayers subsequently choose to disclose their identity.

This initiative was introduced following advice from the tax profession that many taxpayers with previously undisclosed offshore income were hesitant to make voluntary disclosures for fear of criminal prosecution. Such hesitation was inevitable, given that the announcement of the 2007 initiative came the day following the sentencing of Glen Wheatley to two and a half years imprisonment, even though he pleaded guilty to evading $318,092 in tax (with the assistance of a Swiss bank account) and agreed to cooperate with authorities in other investigations. The no-names feature of the initiative effectively allows taxpayers to, in effect, peek around the corner before deciding whether to come out with their hands above their heads.

However, it is questionable whether the introduction of this no-names feature will serve as an extra incentive for otherwise reluctant taxpayers to come forward. The old initiative already offered taxpayers who voluntarily made full and true disclosures significantly reduced prospects of criminal investigation. In the ATO publication "Tax havens and tax administration," published in June 2009, Commissioner of Taxation Michael D’Ascenzo states (at p. 26) that the Commonwealth Director of Public Prosecutions (CDPP) is the only person who has statutory authority to give immunity from prosecution. The CDPP has advised that he will favorably consider granting an indemnity from criminal prosecution, in accordance with the Prosecution Policy of the Commonwealth. That is, people who make a voluntary disclosure that indicates possible criminal offenses may avoid criminal prosecution if, among other things, the case does not exhibit a significant degree of criminality, the taxpayer provides information about the role of any promoters and the taxpayer agrees to cooperate with any consequential investigations and legal proceedings by, for example, agreeing to be a witness for the Commonwealth. The ATO cannot guarantee immunity from prosecutions, but if the ATO agrees that it will not investigate the tax crimes that may have been committed, how likely is it that anyone else will investigate them? Possibly the Australian Crime Commission might be interested, but the criminals they are looking for tend not to qualify for the ATO's decision not to investigate.

A perceived benefit for the taxpayer in approaching the ATO anonymously is that if the ATO gives an indication that the taxpayer is likely to be the subject of criminal investigation upon disclosing his/her identity, the taxpayer has a right to remain anonymous. In that case, of course, the taxpayer's voluntary disclosure will not be considered to be “full” or “complete” and the taxpayer will not be entitled to the abovementioned reductions in penalties and interest charges.

However, the ATO will seek to use information from all disclosures – whether anonymous or not – for intelligence purposes, and it is likely that those who choose to remain anonymous may be found out later. The finger-pointing which acted as the catalyst for the recent and major offshore tax-evasion busts concerning a bank in Lichtenstein and a banked based in Switzerland should put taxpayers on notice that anonymity in the world of offshore tax evasion is becoming extremely fragile. In the words of the Commissioner, "It only takes one of the people or businesses you deal with to do the right thing...and you are vulnerable."

Taxpayers who are likely to face criminal investigation should consider making full and complete disclosure without recourse to the no-names incentive. Being completely up front from the first disclosure will demonstrate a strong desire to right past wrongs, will save the ATO resources and may be looked upon favorably by the CDPP.

Important Incentive: The Growing International Scrutiny of Tax Evaders

Perhaps the greatest practical incentive for taxpayers to take advantage of the new initiative is the increased intensity and coordination with which the world's nations have begun to scrutinize the financial and legal systems of tax havens. Earlier this year, the G-20 leaders agreed “to take action against uncooperative jurisdictions, including tax havens” and announced that “the era of bank secrecy is over.” Since then, countries that have previously maintained strict confidentiality laws are succumbing to international pressure and committing to greater transparency and exchange of information.

All Organisation for Economic Co-operation and Development (OECD) countries, including Australia, have accepted the OECD exchange of information standards. More than 90 tax information exchange agreements have been signed and some 60 treaties have incorporated the OECD standards. Australia has signed exchange agreements with 9 countries and is in negotiations with another 16.

The OECD standards are not without flaws and, given that many countries endorsed the OECD standards only in the last year, implementation issues will inevitably arise. However, Australia is well placed to deal with any such issues and was recently elected chair of the Global Forum on Transparency and Exchange of Information for Tax Purposes that will soon conduct a review of the exchange agreements to help ensure that signatory countries are able to effectively exercise their rights under the agreements and enforce their tax laws.

Last Chance to Come Clean…

The world's developed countries have recently taken large steps towards curbing the bank secrecy that has, for many years, made tax havens an effective vehicle for international tax evasion. As tax havens become more transparent and share information with other countries, taxpayers who have previously failed to declare offshore income are increasingly at risk of being discovered. When they are discovered, large penalties, including the possibility of prison time, will apply.

The Commissioner has stated that the ATO's revised voluntary disclosure initiative will be the last one. That is, the cutoff is the cut-off. Taxpayers falling within the ambit of the initiative should give it very strong consideration.