ATO scrutinising gifts and loans from oveseas
Disguised offshore income & gains
Taxpayers that have received gifts or loans from overseas family and relatives beware. The ATO is currently scrutinising these types of transactions as it continues to encounter instances where Australian taxpayers have failed to declare offshore income or capital gains. Instead, the ATO says these capital gains or foreign income have been returned to Australia disguised as a gift or loan from a related overseas entity. Taxpayers who have received genuine gifts or loans should ensure that appropriate documentation is maintained.
The ATO has recently issued a taxpayer alert warning taxpayers against disguising undeclared foreign income as gifts or loans from related overseas entities, including family and friends. The ATO says it has continued to encounter instances where Australian resident taxpayers derive income or capital gains offshore which are assessable but fail to declare it in their income tax returns.
Arrangements being examined
Specifically, the ATO will be looking closely at arrangements where taxpayers are aware of their tax residency status and the tax implications that flow from it but attempt to avoid or evade tax on their foreign assessable income. Individuals that are Australian residents for tax purposes are assessable on the worldwide income they derive as well as on certain profits derived by offshore entities they control. Attempts to conceal the true income character of funds upon their repatriation to Australia by disguising the funds received as either a gift, or a loan from a related overseas entity will be identified and examined in detail.
Characteristics of genuine gifts and loans
A genuine gift or loan will exhibit the following characteristics:
- the characterisation of the transaction as a gift or loan is supported by appropriate (contemporaneous) documentation;
- the behaviour of the parties is consistent with that characterisation; and
- the monies provided are sourced from funds genuinely independent of the recipient of the gift or loan.
If family or friends that reside overseas have provided a genuine gift to either you or your business, it is prudent to keep supporting documents such as:
- declarations the donor has made in their country of residence about the nature of the amounts transferred;
- executed contemporaneous deed of gift prepared by the donor;
- formal identification of the donor (g. 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 a gift is received via an inheritance, a certified copy of the donor’s will or distribution statement from the estate should be kept with your tax records.
In relation to genuine loans from overseas entities which might be made to help start a business or acquire income producing assets in Australia, supporting documents may include, but are not limited to the following:
- 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 (e. pre-contractual negotiations or variations post agreement);
- documents in relation to security or guarantees provided;
- a personal statement of assets and liabilities provided to a financial institution listing the receipt as a loan;
- arrangements governing the draw down 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 on interest.
Where there is any uncertainty about whether particular amounts are genuine gifts or loans, the ATO will form its view based on all the available evidence. In addition, the ATO notes that a deed of gift or a statutory declaration (provided either by the donor or the receiver) may not necessarily be accepted at face value as being conclusive evidence of the receipt having that character. This is especially so where the objectively ascertainable facts do not support the alleged gift or loan characterisation.
If you or your business has received genuine gifts or loans from overseas related entities or family members, make sure you keep adequate contemporaneous documentation recording the transaction.
Contact us today for expert advice and assistance.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.