The Tax Commissioner has argued successfully that above $1.6m deposited in a couple’s bank account was assessable income, not a loan or a gift from friends. The case of Rusanova and the Commissioner of Taxation is a compelling example. The plot includes an Australian resident Russian couple who received over $1.6 million in unexplained bank deposits and over $67,000 in interest. It involves the Russian father-in-law, who is a seafood exporter, a series of Australian companies, and a generous friend who provided loans in $20,000 tranches.
The main thing about the case prior to the Federal Court is whether you have evidence to prove to the ATO that unexplained deposits must be considered gifts or loans. If the Commissioner finds the deposits are income, he can release a default tax assessment and decide what tax must be paid. It will be the taxpayer’s responsibility to prove the Tax commissioner wrong.
The Unexplained Deposits
Between 2012 and 2016, an Australian couple had around $1.6m deposited into their account. Besides this, neither lodged tax returns, believing they had no income. They claimed the money was a gift from the wife’s father, but they had no evidence to support this claim.
A friend also deposited approximately $20,000 into the husband’s account over a week, claiming it was interest-free with no terms, though there was no supporting evidence. The husband repaid more than the loan amount, including transferring a Porsche Cayenne to a friend in Russia.
Despite this, the husband held directorship in 4 Australian companies that failed to lodge tax returns, including one seafood wholesaler associated with his father-in-law’s Russian export business. The husband claimed he worked on the business without pay.
Contesting the Tax Commissioner
In the year 2017, a secret tax audit used bank entries to check the couple’s tax liability, resulting in a default assessment depending on unexplained deposits and expenses. The couple contested the assessment, which was partially allowed, leading to a second assessment that they again challenged at the Administrative Appeals Tribunal (AAT) as excessive.
The AAT found no appropriate evidence or documentation to support the claim that the deposits were gifts or loans, indicating that the couple failed to prove their income or the nature of the deposits. The Federal Court upheld the tax assessment and fines, dismissing the couple’s appeal with costs.
Avoiding the Gift Tax Trap
A gift of money or assets received from an individual is not taxable if the gift is given voluntarily, nothing is expected in return, and the person who gives a gift doesn’t materially benefit. However, in some circumstances, tax might apply.
Gifts from a foreign trust
If you are a beneficiary of a foreign trust and tax resident of Australia, you may have to mention some of the paid amounts in your tax return. This would apply even if you were not the direct beneficiary of the foreign trust.
Inheritances
Property or money inherited from a deceased estate is not taxable. However, in some circumstances, CGT might apply when you sell an asset you inherited. For instance, if you inherit your parents’ house, CGT doesn’t apply if:
- the house was their primary residence
- your parents are Australian residents for tax purposes
- you dispose of the property within 2 years.
However, CGT applies if:
- you dispose of the main residence of your parents for more than 2 years after inheriting it
- the inherited property was not your parent’s main residence, or
- your parents were not Australian tax residents at the time of their death.
Gifting an Asset Doesn’t Avoid Tax
Gifting an asset will not avoid CGT. If you get nothing or less than the market value of the asset, the market value substitution rule might apply. The market value substitution rule can treat you as if you have received the market value of the asset you gifted when calculating any CGT liability.
Donations of cryptocurrency could also trigger CGT. If you donate cryptocurrency to a charity, you will be assessed on the market value of the crypto at the time you donated it. You will be allowed to claim a tax deduction for the donation if the charity is a deductible gift recipient and the charity is set up to accept cryptocurrency.
More Useful Links:
What Happens to a Business in a Divorce?
The Changes to How Tax Practitioners Work with Clients?