Why you should disclose your offshore bank account
If the 2016 Panama Paper scandal has taught us anything, it’s to fully disclose your offshore bank accounts.
What soon became known as the Panama Papers scandal made headlines around the world. It all started with a huge data leak from a Panamanian law firm, containing information tracking billions of dollars through shell companies around the world.
Before long the scandal has engulfed high-profile figures all around the world, including the Prime Ministers of Britain and Iceland. From tax avoidance and undeclared conflicts of interest to illegal arms trafficking, the scandal exposed the murky world of offshore bank accounts for all to see.
So why is offshore banking often used to conceal a wide range of crimes? And why is it essential to disclose the details of your offshore bank account to the Australian Taxation Office (ATO)? Read on to find out.
Why do people set up offshore bank accounts?
An offshore bank account allows you to invest money overseas. They are offered by financial institutions owned and operated outside Australia. It’s popular in countries that offer lower tax rates or other financial benefits like better interest rates or increased privacy.
There are plenty of reasons why you might want to open an offshore account and access a range of benefits, including:
- Paying less tax
- Accessing foreign investment opportunities and banking products
- Keeping trade secrets, for example stopping your competitors from finding out that your business is planning on manufacturing a new product
- Protecting yourself, for example if your business offers services to foreign military personnel in a war zone
- To stop suppliers over-charging or ripping you off when they discover you are a big-name company
However, as the Panama Papers leak showed, there are plenty of less legitimate uses for offshore bank accounts. Through the use of offshore accounts held in the name of shell companies, it’s possible to hide the true owner of money and assets, conceal the source of the money, and to avoid paying any tax by not declaring it on your income tax return.
While many offshore accounts revealed in the Panama Papers leak were used for simple tax avoidance purposes, others had more worrying links. For example, one British company allegedly used a secret offshore finance company to help North Korea expand its nuclear weapons program.
Who was caught up in the Panama Papers scandal?
Several high-profile figures from all over the world were implicated in the global scandal. Some of the more notable headlines from around the world included:
- Russian President Vladimir Putin was linked with $2 billion of offshore deals and loans
- Icelandic Prime Minister Sigmundur Gunnlaugsson failed to declare his stake in an offshore company
- British Prime Minister David Cameron’s late father was found to have set up an offshore fund in Jersey
- Ukraine’s president Petro Poroshenko set up a secret offshore account while his country’s troops were fighting deadly battles with Russian soldiers
- Members of Chinese leader Xi Jinping’s family are linked to multiple offshore accounts
- Barcelona footballer Lionel Messi was accused of being involved in tax evasion projects
Why should I disclose offshore bank accounts?
Although offshore bank accounts are often linked with tax evasion and other criminal activities, it’s not illegal for Australians to hold funds in an offshore account. However, the Australian Government and the Australian Taxation Office do have regulations surrounding the use of these accounts, so it’s important to familiarise yourself with these regulations before you open an offshore account.
Under Australian law, residents are subject to tax on all sources of income, including those outside Australia. You are taxed on your worldwide income, so you must declare any foreign income you receive on your income tax return. This includes:
- Foreign employment income
- Foreign investment income
- Income from foreign pensions
- Foreign business income
- Capital gains on overseas assets
The ATO’s website states that any income from offshore bank accounts must be declared in your income tax return. If you’ve already paid tax on that income in another country, the ATO allows you to claim a foreign income tax offset.
It’s worth pointing out that disclosing your offshore bank accounts is much preferable to the alternative. Tax evasion is a criminal offence, so if you fail to declare your offshore bank account income to the ATO, you could face hefty fines, have your passport confiscated and even be sent to prison. Fines start from 75% of the tax you fail to play (plus compound interest).
How do I disclose offshore bank accounts?
If you have received income from an offshore bank account in the past financial year, disclosing it to the ATO is quite a simple matter of declaring it on your income tax return.
However, the situation is a little different for those with secret offshore accounts. Government tax departments and foreign revenue agencies around the world have joined forces in recent years to put a stop to non-disclosure of offshore bank accounts. From the ATO to the UK’s Inland Revenue Service, investigations are underway to track down untaxed assets and income hidden in secret offshore accounts around the world.
Up until December 2014, the ATO was running Project DO IT (Declare Offshore Income Today). The program offered several attractive incentives to people who hadn’t fully disclosed their offshore income, allowing them to bring this income into the Australian tax system without incurring significant penalties. More than $240 million in income and $1.7 billion in assets were declared under the program, but it has since come to an end.
The best course of action is to make a voluntary disclosure to the ATO which may lead to reduced fines and lessen the chance of a criminal investigation. Make sure to seek tax and legal advice before making a voluntary disclosure to the ATO but as a general rule, the sooner you disclose your offshore accounts the better.
Still have questions about your offshore account?
Is it illegal to have an offshore bank account?
No, but it is illegal not to declare any income and earnings from your offshore account to the ATO in your tax return.
Did the Panama Papers leak affect Australian taxpayers?
Yes, the leak prompted the ATO to investigate more than 800 wealthy Australians.
Where can I find information on declaring foreign income on my tax return?
You can obtain further details from the ATO or from your accountant or financial adviser.