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The ATO is watching out for taxpayers attempting to avoid or evade tax on their foreign assessable income by disguising amounts as gifts or loans from a related overseas entity. This increased ATO attention has come about with the proposed changes to tax residency rules and signalled by the recent release of Taxpayer Alert TA 2021/2. Genuine gifts or loans from related overseas entities (including family members and friends) are sometimes used to fund business structures or acquire income-producing assets.

A genuine gift or loan is one where all of the following are satisfied:

• the characterisation of the transaction as a gift or loan is supported by appropriate documentation
• the parties' behaviour is consistent with that characterisation
• the monies provided are sourced from funds genuinely independent of you.

When you receive amounts that are genuine gifts or loans from related overseas entities (including family members and friends) to fund your business or to acquire income-producing assets, you must have appropriate documentation that shows the character of the amounts received. Good record-keeping practices are desirable should the Commissioner seek to verify whether the amount you have received is a genuine gift or loan.

Where a genuine gift (including an inheritance) is used to fund your business or to acquire income-producing assets, supporting documents can include:

• any contemporaneous declarations the donor has made in their country of residence about the nature of the amounts transferred
• an executed contemporaneous 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 the donor's wealth before they made the gift
• financial records reflecting the donor's transfer to you.

If there is uncertainty about whether a particular amount you have received is a genuine gift, the Commissioner will form a view based on all the available evidence. A deed of gift may not necessarily be accepted as conclusive evidence that a receipt has the character of a genuine gift. The Commissioner will evaluate it together with other available evidence to determine the character of the receipt.

The Commissioner may also make further inquiries to verify information or documents provided.

Where a genuine loan is used to fund your business or to acquire income-producing assets, supporting documents can include:

• a properly documented loan agreement
• correspondence relating to the loan, including pre-contractual negotiations as to the terms and any variations made post-agreement
• financial records such as bank statements showing the advance of funds and subsequent repayments, including interest and principal payments over the loan term
• financial and accounting records that show how you used the loan amounts, such as
• ledger and journal entries
• bank statements
• credit card statements
• receipts
• account statements or accounting records and ledgers reflecting
• the loan balance outstanding
• the financing costs incurred or paid
• any declarations the lender has made in their country of residence about the provision of the loan
• statements of assets and liabilities provided to a financial institution
• an extract from the lender's financial and accounting records showing the loan balance outstanding
• foreign bank account statements reflecting the transactions relating to the loan and the lender's ability to make the loan
• documents showing payment of withholding tax
• financial plans, cashflow forecasts, net assets position or budgets showing an intention or capacity to repay the loan.

In circumstances where there is uncertainty about whether a particular amount (or amounts) you have received is a genuine loan (or loans), the Commissioner will form a view based on all the available evidence. In this regard, documentation from unrelated parties often provides the best evidence that an amount was received as a genuine loan.

For example, a statutory declaration provided by you or a family member to show that an amount was received as a genuine loan may not be accepted as conclusive evidence of the receipt having that character. In contrast, 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 of such a characterisation.

WLM can help

If you'd like help with understanding your obligations or any further information on gifts or loans from related Overseas entities, please contact us today.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.