Receiving a Christmas or birthday gift from an overseas relative might seem like a thoughtful present. However, recent draft guidance from the Australian Taxation Office (ATO) highlights the situation can be more complex than people might think, particularly when receiving from an overseas trust.
The guidance focuses on trust property that hasn’t been previously taxed. It states that such property becomes assessable income for an Australian resident beneficiary if it’s “paid to, or applied for the benefit of” them. While the legislation isn’t limited to foreign income, the ATO is primarily interested in applying it to untaxed foreign income.
The potential situations where the ATO can deem an amount as assessable income are extensive. The burden of proof to demonstrate any benefit is exempt falls on the taxpayer. This can be challenging, especially when beneficiaries might be unaware are they receiving property or income from a foreign trust, such as distributions from a foreign deceased estate.
Genuine gifts and ATO scrutiny
Looking at foreign gifts more closely, a genuine gift of money or property from relative living overseas is generally not considered assessable income. However, the ATO focuses on the substance of the transaction, requiring appropriate documentation and evidence of the donor’s capacity to make the gift.
The ATO has access to various data sources, including international funds transfer information and tax information exchange agreements with low-tax jurisdictions. It is increasing its scrutiny over undisclosed offshore income, making it crucial to disclose overseas assets as required.
While the draft guidance is helpful, additional practical guidance on related legislation would be beneficial. There are at least two other pieces of related legislations that people must also consider when they receive trust property from overseas.
It also highlights the complexities of dealing with overseas gifts and trusts. People need to be aware of their obligations and ensure they have adequate documentation to support their claims.
This article was first published in the Summer 2024-25 issue of Financial Times.