ATO targets returning expatriates

The Australian Taxation Office (ATO) is currently targeting expatriates returning to Australia, sometimes after an extended time living and working overseas.

The ATO approach may be to suggest an expatriate was an Australian tax resident during the period they were overseas and therefore the expatriate's income earned from overseas employment should be reported as taxable in their Australian income tax returns.

The tax shortfall (if any) may not be significant if the expatriate is living and working in countries with similar effective tax rates to Australia, because taxpayers are generally entitled to foreign tax credits for tax paid overseas. However, the shortfall can be substantial if the expatriate is living and working in countries with low effective tax rates. It would appear the ATO is targeting expatriates from countries with low effective tax rates, often by tracking funds transferred from overseas into Australian bank accounts.

If contacted by the ATO, you should arrange to provide a detailed response to any ATO correspondence relating to your tax residency position. This may include explaining why you were a non-resident. This would be based on the four residency tests in the domestic tax law and any 'tie-breaker' tests if you were living in a country with a double tax agreement with Australia. You should also address such issues as continuing to own a house in Australia or transferring funds to Australia, as these that may lead the ATO to form a preliminary view that you were always an Australian tax resident.

There is an increased risk of the ATO issuing default assessments or amended assessments if you do not respond or do not address the relevant tests, or if you do not provide sufficient evidence to support your position. An automatic penalty of 75% the tax shortfall applies for default assessments.

Therefore we advise that the best approach to resolving these issues is to provide a detailed response before the ATO commits to a position and raises tax assessments on the basis that you were always an Australian tax resident. However, these are potentially complex issues and you may wish to seek advice from your tax agent before responding to the ATO.