Tax: Don't get caught by the global Common Reporting Standards (CRS)
The Common Reporting Standard (CRS) is designed to reduce tax evasion. It is a global reporting system and will affect all taxpayers who have bank accounts in two countries.
Under the CRS regime, financial institutions, such as banks, are required to report foreign tax residency to their country’s taxation authorities. This information is then shared with the relevant taxation authority of the other country.
So, if a person has tax residence in one country and opens a bank account in another country, both countries will report financial dealings to tax authorities in the other country.
When does it start
Tax authorities in participating countries will commence exchanging information from September 2018.
Prior to this date, any new accounts created will require self-certification.
Pre-existing account holders must advise their bank about their foreign tax residency.
How does it work
Opening a new account
When opening a new account, a bank, as a Reporting Financial Institution (RFI), will require a self-certification concerning whether you may be a tax resident in another country, and to provide personal information that will carry hefty penalties if falsely provided.
So, if you are an Australian tax resident and open a new bank account in the Cayman Islands, you will be required to declare whether you are a tax resident of another country, in this case, Australia, and provide your Australian Tax File Number.
Likewise, if you are a tax resident of the Cayman Islands and open a new account in Australia, you will be required to declare whether you are a tax resident of another country, in this case, the Cayman Islands, and to provide your Cayman Island Tax Identification Number (i.e. National ID number).
With almost 100 countries being signatories to the CRS, it is advisable to check the the following links if you are a tax resident of another country. If so, then your financial information will likely be subject to these new rules:
For countries established prior to July 2017, if your bank suspects you are a tax resident of another country, and you have not declared this, your bank will report this to their domestic revenue authority. Banks will use information they have on file to establish whether information needs to be reported.
So, if you are a tax resident of the Cayman Islands and you have not declared to your Australian bank that you are a Cayman Islands tax resident, if your Australian bank suspects you have accounts in the Cayman Islands, the bank account will be reported to the Australian Taxation Office (ATO) and then to the Tax Information Authority (TIA) of the Cayman Islands.
This will, however, be cured by a self-certification to the bank. Under a self-certification, the declared information will be exchanged to the other country’s revenue authority.
The exchange of information between the two taxing authorities will occur annually and allow the ATO to catch a taxpayer if non-compliance is found.
What information will be exchanged?
Account balances and income. The ATO will be particularly interested in large deposits and/or regular deposits of money.
Any Australian financial institution in which you hold monies will report your transaction to the ATO. The ATO will then exchange this information with the country in which you are a tax resident. And vice versa.
What financial institutions will be required to comply with CRS?
The type of financial institutions that are covered by the CRS are:
- Financial institutions: savings banks, commercial banks, savings and loan associations and credit unions;
- Custodial institutions: custodian banks, brokers and central securities depositories;
- Investment entities: entities investing, reinvesting or trading in financial instruments, portfolio management or investing, administering or managing Financial Assets.
What assets are included?
Essentially, the following are assets monitored under CRS:
- Savings in a commercial bank;
- Shares in a corporation;
- Shares or units in a real estate investment trust;
- Note, bond, debenture, or other evidence of indebtedness, including negotiable debt instruments that are traded on a regulated market or over-the-counter market and distributed and held through Financial Institutions;
- Insurance Contract or Annuity Contract.
How will this affect an Australian tax resident who is also a tax resident in another country?
All information that has been collected under the CRS will be exchanged by the ATO with any other CRS signee on 30 September 2018.
The reporting of information is automatic between countries and therefore means that affected individuals need to act quickly when their reporting financial institution contacts them for information!
Many tax reducing methods will soon be defunct. For example, use of the financial product investments as the priority toll for the purposes of defeating taxation obligations will soon be caught by CRS protocols.
What isn’t monitored?
Non-financial assets are not considered reportable information under the CRS. A number of valuable property assets are excluded from the CRS, such as luxury cars, art, yachts, jewellery or, importantly, financial assets that are not connected to a financial institution.
But remember, income derived from an investment property and deposited in a bank account are reportable.
False and misleading statements
Heavy penalties apply if you give false and misleading declarations ie if you lie.
Action: If you have not already done so, declare your foreign tax residency to your bank as soon as possible. If necessary seek legal advice on the implications of money you are receiving from any other country, like the Cayman Islands.