Australian resident taxpayers are required by law to declare foreign income in their tax returns, including income from foreign employment or dividends from foreign investments. While most Australians do the right thing, some taxpayers may attempt to conceal their foreign income to avoid paying tax in Australia.
To address concerns about arrangements where Australians fail to declare foreign income and then disguise the funds received as a “gift” or “loan”, The ATO has released Taxpayer Alert TA 2021/2 Disguising undeclared foreign income as gifts or loans from related overseas entities.
This article explores the details of the recently released Taxpayer Alert.
What are ATO Taxpayer Alerts?
The ATO issues Taxpayer Alerts to warn Australian tax residents of emerging tax risks and issues that the ATO has under risk assessment. Taxpayers can use this information to identify whether they are engaged in behaviour that may land them in legal trouble, and to determine what they should be doing.
Taxpayer Alert 2021/2
This Alert seeks to address situations where an Australian tax resident has been earning income outside of Australia, and where upon repatriation of the foreign assessable income to the taxpayer in Australia, they disguise this income as a gift or a loan from a “related overseas entity” to avoid paying taxes.
A related overseas entity typically refers a family member, friend, or associate, and repatriation is achieved by this person transferring the funds directly to the taxpayer (or an associate), or by using an offshore financial intermediary to transfer the funds.
The source of the foreign income that is repatriated may be:
- Actual amounts of foreign assessable income, such as income from employment, interest, dividends, or a capital gain on the disposal of assets, such as shares in a foreign company.
- Deemed amounts of foreign assessable income, such as amounts assessable under the controlled foreign company (CFC) provisions in Part X of the Income Tax Assessment Act 1936 (Cth), or under the transferor trust provisions in Division 6AAA of Part III.
- Amounts assessable as dividends as a result of section 47A or Division 7A of Part III applying, or amounts from trusts assessable under section 99B.
In some cases, documentation is prepared that purports to show that the repatriated funds have the character of a gift, or an advance of funds by way of a loan. This Taxpayer Alert does not cover circumstances where an Australian-resident taxpayer has received a genuine gift or loan, and there is appropriate documentation available to support this. Conversely, fraudulent claims will raise red flags where the objectively ascertainable facts do not support characterisation of the funds as a gift or a loan.
Penalties for engaging in this conduct
The ATO is concerned that Australian-resident taxpayers are entering into these arrangements to avoid paying Australian tax on their foreign assessable income. In cases where funds are repatriated to Australia in the form of a supposed loan, taxpayers may also take additional advantage of these arrangements to claim deductions for interest that was never incurred.
The ATO states that taxpayers deliberately omitting foreign income, concealing their interests in foreign assets, or making false claims for deductions in their tax returns will face penalties including:
- Serious penalties under Division 290 of Schedule 1 to the Taxation Administration Act 1953 (Cth).
- Sanctions under criminal law (in more serious cases).
- Referral of registered tax agents involved in the promotion of this type of arrangement to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009 (Cth).
If you participate in an arrangement similar to that described in the ATO’s Taxpayer Alert 2021/2, you may be liable for penalties of up to 75% of the tax shortfall (in addition to being required to pay any tax that is avoided).
In its recent Taxpayer Alert, the ATO has highlighted its focus on Australian-resident taxpayers who attempt to avoid paying tax in Australia on foreign income sources, by disguising the funds as a gift or a loan. Serious penalties may apply for engaging in such conduct, including steep fines and possible criminal sanctions.