Do I need to pay tax on that birthday gift from an overseas relative?

You won’t be surprised to hear that there is no simple answer to this seemingly simple question.

It is entirely possible that the $50,000 Aunt Jane in New Zealand gave you for your milestone birthday is not tax-free to you as you first thought.

Is it a genuine gift/loan?

Broadly, if a gift of money or property was a genuine gift or loan from a foreign related entity or relative, it is not considered as assessable income and you do not need to pay tax on that amount.

The ATO has published guidance on what it considers to be a genuine gift/loan. The ATO looks for substance over form of the transaction, whether the characterisation is supported by appropriate documentations, the ATO may also look at evidence the donor’s capacity to make the gift from their own resources depending on the size of the gift and the nature of the relationship.

At the end of the day, when the ATO knocks on the door, it is your responsibility to provide evidence to prove that the money or property you received from overseas is a genuine gift/loan.

So it is not just a gift, what do I need to do?

Continuing with our example of Aunt Jane’s $50,000 gift of money, life gets a bit more complicated if the $50,000 came out of her NZ trust as a trust distribution to you.

In this case, you may need to include some or all of the $50,000 as your assessable income depending on the nature and characteristics of this distribution:

  • Whether the trust derived the $50,000 in the same income year that it was distributed to you
  • Whether it was sourced from NZ capital gains
  • Whether it was sourced from the trust corpus (the trust settlement sum)

On top of the income tax that you have to pay, you may also be liable for a special interest charge if some or all of the $50,000 amount has not previously subject to tax in Australia or in a *listed country.

As illustrated in the above example, it is important that you ask Aunt Jane to provide documentation that can identify and support the sources and components of a trust distribution to you and maintain documentation.

Would the ATO know about my ‘gift’ from overseas?

The ATO has access to data a variety of sources, includes:

  • AUSTRAC shares information about international funds transfers with the ATO readily and regularly and the ATO uses the data to match information reported in the tax returns
  • For those Australians with income from or assets in low tax jurisdictions such as Jersey, BVI, the Cayman Islands, the Australia Government has tax information exchange agreements to exchange tax information in case of a tax investigation.
  • Greater availability and access of data coming out of OECD initiatives

The ATO increasing its scrutiny over undisclosed offshore income. More recently the ATO issued an alert (TA 2021/2) in September 2021 signalling the ATO’s audit focus in the coming years.

Disclosure of overseas assets

There is a requirement to disclose to the ATO in an individual’s Australian income tax return if during an income year the person owns or has an interest in assets located outside Australia which have a total value of A$50,000 or more. This disclosure allows the ATO to collect information in relation to whether the individual has undeclared any foreign income.

Key takeaway

Money from overseas is most welcome, at the same time you express your gratitude you will also need to consider whether you need to pay tax on it.

If you would like further information on issues covered in this article, we are more than happy to assist.

*Listed counties are Canada, France, Germany, Japan, New Zealand, UK and USA

This article was first published in Personal Wealth Adviser – Issue 7.