Recently, the ATO highlighted its focus on combatting practices where undeclared foreign income is disguised as gifts or loans to avoid paying tax in Australia.
But what about genuine gifts or loans from related overseas entities that are used to fund business or financial activity? Will this put you on the ATO’s radar?
The ATO outlines the key considerations and what you should do to protect yourself.
Genuine gifts or loans from related overseas entities
A “related overseas entity” typically refers to a family member, friend, or associate who is located overseas. An example of a gift from a related overseas entity is an inheritance from a family member who lives in a foreign country.
Given the ATO’s increased focus in this area, you may be wondering whether it is legal to use such money to fund business structures or to acquire income producing assets. The key is to ensure that the gift or loan is genuine, and that you keep appropriate documentation.
What is a “genuine” gift or loan?
The ATO states that a genuine gift or loan is one where:
- The characterisation of the transaction as a gift or loan is supported by appropriate documentation,
- The parties’ behaviour is consistent with that characterisation, and
- The monies provided are sourced from funds genuinely independent of you.
Documenting genuine gifts from related overseas entities
Documents to support a genuine gift that is used to fund your business or to acquire income producing assets include:
- An executed deed of gift prepared by the donor.
- Formal identification of the donor.
- A certified copy of the donor’s will.
- A copy of the donor’s bank statements showing the gift.
- Financial records reflecting the donor’s transfer to you.
Documenting genuine loans from related overseas entities
Supporting documentation for a genuine loan used to support business or financial activity includes:
- A properly documented loan agreement.
- Correspondence relating to the loan.
- Financial records such as bank statements showing the advance of funds and subsequent repayments, including interest and principal payments.
- Financial and accounting records that show how you used the loan amounts.
- Foreign bank account statements reflecting the transactions relating to the loan.
What happens if the ATO doubts that a gift or loan is genuine?
Where doubts arise as to the authenticity of a gift or loan, the Commissioner of Taxation will form a view based on all the available evidence.
For example, a deed of gift may not necessarily be accepted as conclusive evidence that a receipt has the character of a genuine gift.
In proving that a loan is genuine, documentation from unrelated parties such as financial institutions often provides the best evidence that an amount was received as a genuine loan.
The ATO is cracking down 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. This may raise concerns amongst law-abiding taxpayers who receive genuine gifts or loans from related overseas entities and use these to fund business structures or to acquire income producing assets. If such a gift or loan is indeed genuine, as defined by the ATO, it will be prudent to ensure that you keep appropriate documentation to support this.