The ATO continues to increase its use of data matching. Some examples include a new tax residency data-matching program (where the Department of Home Affairs will provide the ATO with arrival and departure records), and an extension of its motor vehicle data-matching program (collecting records from State and Territory motor vehicle registries) ‘to identify taxpayers that have purchased vehicles with values that are not commensurate with the income they have reported’.
The ATO website refers to its data-matching programs as follows:
Our data-matching programs are designed to increase community confidence in the integrity of the tax system.
We use the data to:
- help individuals and businesses understand their tax obligations, including registration, lodgement, reporting and payment;
- protect honest businesses from unfair competition;
- make it easier for individual taxpayers by pre-filling their returns;
- assess the levels of voluntary compliance of individuals and businesses with their tax obligations.
If we check your information, it doesn’t automatically mean we think you are dishonest in your tax affairs. If the data doesn’t match, we will contact you to find out why.
The ATO obtains information from various sources including employers, financial institutions, private health funds, government agencies, etc, and the ATO website states:
We match the data we hold with details provided on your tax return. If we identify differences, we may send you a letter outlining the discrepancy.
These letters are referred to on the ATO website as ‘data-matching letters’ and there are various types of letters listed across areas such as CGT, dividend income, interest income, Government benefits, employee share schemes, rental expenses, foreign source income, taxable government grants and payments, etc. (Refer to this link for a full list.)
Of these, we will take a look at the ‘foreign source income’ data-matching letters, as we have seen a number of these recently (which may indicate the ATO is increasing its focus in this area).
Foreign Source Income Letters
The ‘foreign source income’ data-matching letters we have seen may contain the headline: ‘You may have forgotten to include foreign source income on your tax returns’. The letters then include a schedule where it lists one or more transactions, and the amount of each transaction.
By way of background, the information included in the schedule generally refers to amounts reported to the ATO via the Australian Transaction Reports Analysis Centre (or AUSTRAC). Businesses (mainly financial institutions) are required to report to AUSTRAC all cash (including electronic) transactions greater than A$10,000. However, it may also be information obtained from a foreign country’s tax authority under a double tax agreement (DTA), although the recent examples we have seen have only referred to AUSTRAC amounts.
In terms of the data-matching process, the ATO website includes the following explanation in relation to foreign source income letters:
We may send a letter about foreign source income if we receive information that you derived income or other taxable amounts from foreign sources and these do not match amounts included in your tax return.
If you received income from overseas, you must declare this on your Australian tax return. Foreign income exempt from Australian tax may still be taken into account to work out the amount of tax you have to pay on your other income.
The letter will include a schedule showing the relevant information from your tax return compared with the information we hold.
All foreign income, deductions, and foreign tax paid must be converted to Australian dollars before you include them on your tax return.
If you have other foreign source income that you did not declare you should advise us of these as part of this review.
An example of the wording used in a foreign source income letter is as follows:
‘We’re reviewing your 20XX and 20XY income tax returns.
We’ve received information from the Australian Transaction Reports and Analysis Centre that doesn’t match what you’ve included on your tax returns. We’ve included a schedule with this letter that shows the details of the foreign transactions reported to us.
What you need to do
Check the information in the schedule against your records.
If you agree with our information, you don’t need to do anything. We’ll revise your tax returns and send you Notices of amended assessments to your myGov inbox.
If you don’t think these amounts are income, you need to phone us by XX Date XX.’
There is some curious use of wording in both of the above references, particularly given the ATO’s general statement that ‘If we check your information, it doesn’t automatically mean we think you are dishonest in your tax affairs. If the data doesn’t match, we will contact you to find out why.’.
Firstly, in terms of the language used:
- the ATO website states: ‘We may send a letter about foreign source income if we receive information that you derived income or other taxable amounts from foreign sources and these do not match amounts included in your tax return.’ (emphasis added); and
- the foreign source income letters state: ‘We’ve received information from the Australian Transaction Reports and Analysis Centre that doesn’t match what you’ve included on your tax returns.’ (emphasis added)
Both of the above emphasised statements appear to start with an presumption that the amounts listed in the schedule are in fact income and that, as it does not match to amounts disclosed on the tax return, the taxpayer has not disclosed amounts of foreign source income. This, despite the ATO’s general comment on its website that ‘it doesn’t automatically mean we think you are dishonest in your tax affairs’ and that ‘If the data doesn’t match, we will contact you to find out why’.
More commonly, the amounts in the schedule that the ATO has received information from AUSTRAC, would simply reflect a cash transfer between accounts. Such transactions may or may not be amounts of income, and it is unlikely that any of the notations of the transaction would be definitive in this regard.
By way of example, a transfer from a foreign bank account to an Australian bank account would not automatically be reflective of income (although it may require an explanation of the original source of the funds in the foreign bank account).
Also by way of example, if a taxpayer sold a foreign asset and the proceeds were deposited into a foreign bank account, and then some or all of those funds were transferred to an Australian bank account, the amount transferred may not be reflective of income. The amount transferred could be a return of all or part of the capital proceeds from an asset sale. We note in this example, if there was a capital gain derived then this would be required to be included in the tax return. If no such disclosure is made, then this would be sufficient for the ATO to ask the question and send a letter. However, if a gain was made and disclosed in the tax return, but the amount of the gain was smaller than the amount transferred, the gross amount transferred and included on the ATO schedule would not match with the amount included in the return. Again, this may be sufficient for the ATO to ask the question and send a letter, but not to presume that the amount received was automatically an amount of foreign income.
Secondly, there is an element of ambiguity and the risk that a taxpayer may not deal with the letter appropriately. In this regard we note particularly the line: ‘If you agree with our information, you don’t need to do anything.’
By way of example, where a taxpayer receives such a letter, reviews the amounts referred to in the schedule against its own records (e.g. checks its bank statement) and the amounts in the schedule and the bank statement match up, the taxpayer may take the view that as the amounts match that the taxpayer does not need to do anything. However, if the taxpayer does not respond the default position would be the ATO issuing an Amended Assessment and included the gross amount as foreign income.
From our viewpoint, the approach and language used by ATO could be improved to remove any such ambiguity.
Thirdly, if a taxpayer disagrees with the information contained in the schedule, the foreign source income letters ask the taxpayer to call the ATO. During these calls, the ATO continues to adopt an approach that the taxpayer has made an error, and then asks the taxpayer to provide an explanation of why the amounts are not income. Further, the ATO typically also requests to be provided with evidence to prove that the amounts referred to are not foreign income.
It is noted that the onus of proof lies with the taxpayer. However, when the information being provided by the ATO is likely to not reflect an amount of foreign income, then the approach should be one seeking clarification rather than a presumption of non-compliance.
The use of data matching may prompt the ATO to ask questions of a taxpayer, but this could be done on the basis of assuming that the taxpayer has not done anything wrong. The aim of the letters should be to alert the taxpayer of a data mismatch including providing the taxpayer with an explanation of why the mismatch has resulted in the letter being sent. For example, the letter has been sent because the information indicates the taxpayer has received amounts from a foreign source however the tax returns did not disclose any amounts as foreign income.
The letters could then explain the ATO is seeking to understand the nature of the amounts received, also acknowledging that the full amount stated in the schedule may not be income or only a part of the amount may be assessable income. By alerting the taxpayer of the data mismatch the ATO is engaging with the taxpayer and providing the taxpayer with an opportunity to clarify the position with the ATO. After all, some amounts may be fully exempt from tax in Australia (e.g. an amount gifted or inherited from a foreign relative), or only a portion of the amount may be assessable income (e.g. if the amount relates to proceeds from the sale of a foreign asset, only the capital gain component would be income, and not the full amount transferred).
We note the foreign source income letters do provide an opportunity for the taxpayer to make a voluntary disclosure, but this is only made later in the letters after the wording used that presumes the taxpayer has failed to include amounts as foreign source income, when this may not be the case.
No doubt some taxpayers will have made an error and failed to disclose amounts that should have been included in the tax return. However, equally many taxpayers may have complied with their tax obligations, and this process should be the first step in them being able to clarify this with the ATO.
In this regard, we would like to see the ATO using language and an approach that promotes an engaged response from taxpayers. Instead of ‘it doesn’t automatically mean we think you are dishonest in your tax affairs’, maybe ‘there is a mismatch in the information we have received and we are seeking your input to help us better understand the background and to clarify whether you have met all your tax obligations’.
From the taxpayers perspective, early engagement with the ATO and taking the time to respond to the ATO’s request should be beneficial – not only to clarify the correct treatment of amounts received (whether they are foreign source income or not), but also in terms of saving time and potential costs to the taxpayer (as responding to an amended assessment would generally require the more formal process of lodging an objection).
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.