In September 2021, the ATO released a taxpayer alert (TA 2021/2) and some specific website guidance dealing with gifts and loans received from overseas related parties. This appears to be a focus area for the ATO at the moment with the ATO seemingly concerned that some taxpayers are either trying to disguise income as a gift or loan or are failing to recognise the Australian tax implications of receiving funds from related parties.
The key message is that clients need to clearly document the nature of any receipts in order to ensure appropriate tax treatment applies and to reduce the risk of the amounts being treated as income for the recipient.
The ATO indicates that to support the characterisation of a receipt as a genuine gift or loan all of the following need to be considered:
- Whether the transaction is supported by appropriate documentation;
- Whether the parties’ behaviour is consistent with the amount being a gift or loan; and
- Whether there is evidence the receipt is sourced from funds genuinely independent of the
For these purposes the ATO’s guidance indicates that appropriate supporting documents can include:
- Any contemporaneous declarations the donor has made in their country of residence about the nature of the amounts transferred;
- A deed of gift prepared by the donor;
- Formal identification of the donor (such as a copy of their photo identification from their passport or identity card);
- A certified copy of the donor’s will or distribution statement for the estate;
- A copy of the donor’s bank statements showing the gift and potentially also the source of the funds;
- Financial records reflecting the donor’s transfer to the
While the ATO indicates that a deed of gift or statutory declaration might not be accepted as conclusive evidence of the nature of the arrangement on their own, these could still be taken into account in determining the whether the receipt is a genuine gift or loan.
In TA 2021/1 the ATO states that it is currently undertaking reviews and audits and actively engaging with taxpayers who have entered into arrangements where taxpayers appear to be attempting to conceal foreign assessable income or foreign assets. This involves using the ATO’s exchange of information powers to gather information from other countries and data from AUSTRAC.
Where taxpayers participate in arrangements similar to those described in the alert they 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).
The alert does not specifically cover circumstances where an Australian resident taxpayer receives a genuine gift or loan from a related overseas entity. However, the ATO notes that taxpayers and practitioners should still take care when gifts or loans are received from overseas related parties because there could still be tax implications for the recipient.
For example, if it appears that the funds have been received directly or indirectly from a foreign private company then it is necessary to consider the possible application of Division 7A. If it appears that funds have been received from a foreign trust then this could trigger tax implications under section 99B if the funds relate to income or gains that have been made by the trust and which have not yet been taxed in Australia.
Where clients are receiving funds from overseas it is increasingly important to ensure they have appropriate evidence which explains the nature and source of the funds and to ensure that the Australian tax treatment is carefully analysed.
