One of the things I love about Australia is our multiculturalism and the benefits that this brings to both our culinary and everyday life experiences. For many years, Australia has been welcoming immigrants and refugees from the many corners of the world, many of whom are now seeing their third or fourth Australian generations being born.
With the passing of these original immigrants, practitioners and executors alike need to be alert to taxation issues when advising or actually administrating these estates, as many of these people may have undeclared foreign assets and income which they have never declared in Australia which now present a real problem and potential risk to their executor. Such assets may not have been declared for a number reasons, such as an inborn distrust of governments from their home country, the perceived need to keep a quiet safety net, a conscious decision to avoid paying income tax or a complete lack of knowledge of how the Australian taxation system works. Either way, we are now seeing the adult children of these immigrants, many of whom were born in Australia and have never known anything else but an Australian life, having to administer their parent’s estates and being faced with the massive burden and responsibility of undeclared offshore assets and income.
The events below highlight just but a handful of the many issues we are increasingly seeing in estates involving immigrants. There appears to be an endless variety of issues with such estates and accordingly, no matter the size of the estate, practitioners should ensure that their estate administration procedures can identify and flag such issues.
………Having lost her husband, the deceased moved to Australia in the early nineties to be closer to her four adult children, all of whom had migrated to Australia many years earlier and had each respectively started their own families.
The deceased had acquired two very high end residential rental properties in Australia and a home for herself to live, all of which had been fully funded from funds that she had brought from abroad. She was an extremely private and independent lady who did not speak English, and whilst not highly educated, had managed to accumulate some wealth over the years through both her hard work and investments, which was now combined with the proceeds from her late husband’s estate.
Upon her passing, an application for probate had been made and granted to her eldest child. In the proceeding months, it unfolded that the deceased had never actually obtained a tax file number in Australia and accordingly had never declared any of the rental income from the investment properties, which had across the years amounted to a very significant amount of money.
The executor intended to sell the two properties to enable the estate to be divided equally between her siblings and herself, which would clearly trigger two very sizable taxable CGT events, which she would be obliged to declare within the estate’s income tax return…..
As many readers would be aware, section 260-140 of the Tax Administration Act (1953), places the LPR in the shoes of the deceased, and accordingly provides the LPR with the same rights and obligations as that of the deceased. This section also enables the Commissioner to recover debts and tax from LPRs, as he has the right to recover from the deceased. Moreover, that an executor can, in certain circumstances, be held personally liable for tax obligations of an estate that arise post the distributed the corpus of the estate. An executor also has an obligation to address any outstanding or incorrect taxation affairs of the deceased which they should have become aware of during their estate administration.
As a result, in this case the LPR had little option but to find a method of dealing with the above retrospective issues. The months ahead were nothing short of a nightmare, as she tried to reconstruct some 25 years of her mother’s financial affairs. This involved tracking down multiple real estate agents (some who had gone out of business), dealings with multiple banks and untold horrors of dealing with local councils.
To add to the burdens, and not to mention the family’s utter surprise, the discovery of a number of very sizable offshore term deposits had surfaced as they sorted through their mother’s personal belongings. This raised another fresh layer of issues for the poor executor in so far that Australian residents are required to report and pay tax on their global income (which had clearly never occurred), and secondly, that when this money was expatriated back to Australia, that it would become clearly visible to local authorities, which could result in a cascading serious of questions and issues.
The one positive outcome of this latest development that would prove useful in our later negotiations with the ATO, was that the deceased had died a few months prior to the end of the Commissioner’s ‘Project Just Do it’, a semi-amnesty period that enabled taxpayers to come forward to declare any offshore income without the Commissioner applying the full force of the law such as interest and penalties against the taxpayer. Of note is that since the cessation of this project, is that the potential penalties associated with not declaring this income can be as much as 75% of the unpaid tax, before accumulated interest.
Cutting to the end, this case ended up with a voluntary disclosure being made to the ATO. A voluntary disclosure that netted the ATO a seven figure payment of primary tax, a commendation in the form of very favourable interest and penalties being granted to the executor in consideration of the extensive efforts and levels that she had gone to meet her obligations, and by far much more importantly, peace of mind for the executor who now had official sign off by the ATO in relation to these matters, including for years where full information could not be obtained.
It is in our regular experience, that the Commissioner looks very favourably upon executors who come forward to declare and resolve historical tax issues of a deceased person. There is an understanding and respect that the executor has not created these issues, but is rather trying to work with the ATO to resolve them. Such an accommodating position by the Commissioner is to be highly commended and will hopefully encourage more executors to come forward with historical issues that they may uncover through their administration process; all of which I suggest is in the best interest of both the executor and also that of the general public, as ultimately and correctly more tax, that should have been collected previously, is rightly now collected.