Over 600 journalists from 177 countries, as part of the International Consortium of Investigative Journalists (ICIJ), recently released more than 11.9 million files containing the financial activities of some of the worlds richest and most powerful people. Like the previously released Panama and Paradise Papers, the Pandora Papers reveal how the ultra wealthy hide their assets and minimize tax through complex cross border offshore networks.

How do they do it?

The Pandora Papers spotlights the booming offshore financial services industry, where shell companies in tax havens are set up using specialist firms, who are paid to establish and run the companies on behalf of the wealthy. These specialists will provide addresses and names of paid directors who appear on the company records but who may not have any real connection with that company. Assets owned by offshore companies in these jurisdictions can be hidden through layers upon layers of trusts and companies, where it can be hard to find the true beneficial owner of an asset.

These offshore companies exist in name only, have no staff or office and are prominent in jurisdictions such as the Cayman Islands, Panama, Switzerland, the British Virgin Islands and Singapore. The term ‘offshore’ simply means that these companies or territories have favourable rules and regulations allowing persons to easily set up a company in their jurisdiction, have laws that make it difficult to identify the owners or beneficiaries of companies and trusts and they have a low or no corporate tax rate.

Is this Legal?

In Australia, it is legal to be the beneficiary of an offshore company or trust. As an Australian tax resident, you must report your worldwide income as part of your assessable income, on your Australian tax return. It is illegal in Australia to fail to report this income.

Special rules can apply for foreign companies and trusts controlled from Australia. These include the Controlled Foreign Company (CFC) rules, transferor trust rules, or simply a finding that an entity is in fact a resident of Australia. This was the outcome in Bywater Investments v FCT [2016] HCA 45, where the central management and control of entities was in Australia.

What is the ATO’s position?

The ATO has released a statement indicating that it will be analysing the information to identify any possible Australian links and evidence of Australians engaging in tax evasion. ATO Deputy Commissioner Will Day stated there are a number of legitimate reasons that someone may have an offshore bank account or structure and that most Australians are doing the right thing. However any attempt to hide ownership interests or financial misdoings offshore will be investigated by the ATO.

If you have any questions about existing or proposed offshore companies, tax havens, or your reporting obligations, Chamberlains Law firm has a team of international tax specialists who can assist with all your structuring questions.