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 disguised as a gift or loan from a related overseas entity and returned to Australia in a more tax effective manner. Taxpayers who have received genuine gifts or loans should ensure that appropriate documentation is maintained.
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 instances where Australian resident taxpayers derive income or capital gains offshore which are assessable but fail to declare it in their income tax returns.
Individuals that are Australian residents for tax purposes are reminded that they are assessable on the worldwide income they derive as well as on certain profits derived by offshore entities they control.
Specifically, the ATO will 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 funds as either a gift, or a loan from a related overseas entity.
Whether or not a gift or loan is genuine depends upon the following being satisfied:
- the characterisation of the transaction as a gift or loan as 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.
If family or friends that reside overseas has 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 (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, an in those circumstances, a certified copy of the donor’s will or distribution statement for the estate should be a part of the record keeping.
In relation to genuine loans from overseas entities to perhaps help start up a business or acquire income producing assets, supporting documents may include, and 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 (ie pre-contractual negotiations or variations post agreement);
- documents in relation to security or guarantees provided;
- 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.
According to the ATO, if there is any uncertainty about whether particular amounts are genuine gifts or loans, it will form a view based on all the available evidence, therefore, it is recommended that contemporaneous and complete records be kept. In addition, 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 of the receipt having that character.
Need to beef up your record keeping?
If you or your business has received gifts or loans from overseas entities, make sure you have adequate documentation, for example, the ATO notes that a personal statement of assets and liabilities provided to a financial institution listing the receipt as a loan is more likely to be accepted as strong evidence. Contact us today for expert advice.