By Harrison Dell, Director.
You’re here to get the secret knowledge of how to avoid tax like the rich do. But here is the secret.
You can’t use offshore companies and trusts to pay less tax, unless you have very specific circumstances.
In recent years, using offshore companies and trusts for tax minimisation or avoidance has garnered significant attention and tightening of the rules. We explore the legal risks, the Australian Taxation Office’s (ATO) stance, and the fine line between legitimate tax planning and unlawful tax evasion.
What is stopping offshore tax planning?
Australians have been bullied out of using foreign companies and trust because of a range of punitive rules. Previously, Australian’s used many offshore jurisdictions to save tax, mostly under British control such as Jersey, Guernsey, the British Virgin Islands and more.
These entities can be used for legitimate business purposes if planned carefully. Especially funds which are domiciled in no-tax jurisdictions to avoid double tax (a good reason!).
The main rules stopping international tax planning are below.
The Controlled Foreign Company Rules
A Controlled Foreign Company, or CFC, is a company that is controlled by Australian tax residents by shareholding or directors. The CFC rules attribute income of the foreign company to the Australian resident shareholders, making the foreign company useless in tax planning.
There are strategies to circumvent this, most commonly by passing the Active Income Test as we explain in this article.
Corporate Tax Residency
If an Australian resident has “central management and control” of a foreign company, that company may actually be an Australian tax resident. This has been the case since the Bywater Investments case and the ATO released Taxation Ruling 2018/5 to explain their position,
If the foreign company is an Australian tax resident, it simply pays tax in Australia. The same applies to trustees of trusts.
If an Australian tax resident has transferred assets to a foreign trust, that person may be taxed on the trust income – even if they didn’t receive it.
These rules have almost no exemptions and are the main reason why foreign trusts should be avoided where possible.
What does the ATO know?
In recent years, the ATO data matching capabilities have grown massively. The Common Reporting Standard (CRS) will report almost all countries bank account information if a signatory is in Australia, for example.
AUSTRAC also monitors the transfers of funds around the world, mostly for monitoring money laundering, but it can be used for a tax assessment also.
Further, asset betterment audit techniques allow the ATO the estimate your income based on how your assets are growing. Bringing offshore wealth into Australia is an enormous tax risk without careful planning and an appropriate explanation.
Last, the Panama, Paradise and Pandora Papers show that privacy is not an effective counter to tax avoidance. Once the information is out there – the ATO will be very interested.
The use of offshore companies and trusts for tax purposes is a complex area fraught with legal and tax considerations. While there are legitimate reasons for their existence, the ATO’s stringent regulations and international cooperation make tax avoidance through these entities a risky endeavor.
It is possible to do, with the right circumstances and advice. But it is always necessary to seek expert legal advice before engaging in any activities involving offshore entities for tax purposes.
This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.