ATO Scrutinising Gifts or Loans From Overseas

The ATO has recently issued an alert warning taxpayers against disguising undeclared foreign income as gifts or loans from related overseas entities, including family and friends. It says it has continued to encounter situations where Australian resident taxpayers have derived amounts of income or capital gains offshore that are assessable, but the taxpayers have failed to declare the amounts in their income tax returns.

Individuals who are Australian residents for tax purposes should remember that their worldwide income, as well as certain profits derived by offshore entities they control, is assessable income for Australian tax purposes.

The ATO will now be looking closely at arrangements where taxpayers are aware of their residency status and the tax implications that flow from it, but attempt to avoid or evade tax of their foreign assessable income by concealing the character of the funds upon repatriation to Australia by disguising the amounts as either gifts or loans from a related overseas entity.

How to prove a gift is genuine:

• the characterisation of the transaction as a gift or loan is supported by appropriate documentation;
• the behaviour of the parties is consistent with that characterisation; and
• the monies provided are sourced from funds genuinely independent of the gift or loan receiver.

Supporting Documents

If family or friends who reside overseas have provided a genuine gift to an individual or their business, it is prudent for them to keep supporting documents such as:

• any declarations the donor has made in their country of residence about the nature of the amounts transferred;
• an executed contemporaneous deed of gift prepared by the donor;
• formal identification of the donor (eg a copy of their photo identification from their passport or identity card);
• a copy of the donor’s bank statements showing the gift and donor’s wealth before they made the gift; and
• financial records reflecting the donor’s transfer.

Gifts also include inheritances. Where an inheritance is received, a certified copy of the donor’s will or a distribution statement for the estate should be a part of the recordkeeping.

In relation to genuine loans from overseas entities made to help start up a business or to acquire income-producing assets, supporting documents may include the following:

• a properly documented loan agreement that details parties to the loan, date, amount, interest rate, frequency of repayments and terms of the loan;
• correspondence relating to the loan, such as pre-contractual negotiation communications or variations made post-agreement);
• documents in relation to security or guarantees provided;
• arrangements governing the drawdown and transmission of funds;
• financial records showing advance of funds and subsequent repayments, including interest and principal payments over the loan term;
• financial and accounting records showing how the loan amounts were used; and
• documents showing the payment of withholding tax.

If there is any uncertainty about whether particular amounts are genuine gifts or loans, the ATO has said it will form a view based on all the available evidence – therefore, keeping contemporaneous and complete records is strongly recommended. The ATO notes that a deed of gift or a statutory declaration (provided either by the donor or the receiver) may not be accepted as conclusive evidence.

Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.