Many of the Australian Chinese community may be affected by the Common Reporting Standard (CRS) the new international tax reporting system. The CRS is designed to reduce tax evasion.

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 in the other country.

So if a person has tax residence in another country, then the bank in which the person has the bank account will be required to report that to their domestic revenue authority (eg the ATO or SAT).  This information is then reported to the other country’s revenue authority.

When does it start?

Tax authorities in China and Australia will commence exchanging information from September 2018.

Prior to this date, any new accounts created will require will require self certification.

Pre-existing account holders must advise their bank about their foreign tax residency.

How does it work

If you are a Chinese tax resident and open a new bank account in Australia, you will be required to declare whether you are a tax resident of another country eg China and to provide your Tax Identification Number (ie National ID number).

Likewise if you are an Australian tax resident and open a new bank account in China you will be required to declare whether you are a tax resident of another country eg Australia and provide your Australian  Tax File Number.

Pre-existing accounts

For accounts that were 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 China and have not declared to your Australian bank that you are a Chinese tax resident, if your Australian bank suspects you have accounts in China, the bank account will be reported to the ATO and then to SAT unless you cure it by letting your bank know.

This will occur annually and allow the ATO to catch a taxpayer if non-compliance is found.

This will occur when SAT becomes aware of your residency in Australia. The SAT will then exchange that information with the Australian Taxation Office (ATO).

Likewise, any Australian financial institutions in which you hold monies will report your transactions to the ATO. The ATO will then exchange this information with China (SAT)

What information will be exchanged?

Account balances and income. The ATO will be particularly interested in large deposits and/or regular deposits of money.

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 a member of the Chinese community in Australia?

Under the CRS regime, the ATO will exchange your financial information in Australia with SAT, and vice versa.

At the earliest, exchange of information to the ATO will occur on 31 July 2018.

The reporting of information is automatic between countries and therefore means that affected individuals need 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 investment as the priority tool 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 China.

Sean Felthouse, Tania Waterhouse

Waterhouse Lawyers