With Australia being a popular destination for inbound migration and investment, there can be significant sources of funds that may be brought into Australia. Often, these sources of funds may be described as “loans” or “gifts.”
The ATO has been reviewing funds transferred from overseas to Australia especially between related parties with greater scrutiny for over ten years, as it is concerned that there may be undisclosed income from such sources of funds, especially if the ATO is concerned about “unexplained wealth.”
Examples of areas where the ATO may consider such migration of funds may arise to undisclosed income includes:
- An Australian resident disguising a capital gain from the sale of shares or business overseas as a loan from an overseas relative (i.e., Australian taxpayer arranges for a relative to receive the sale proceeds and transfer the funds to them disguised as a loan); and
- An Australian resident deriving foreign income but disguising the foreign income as a gift from an overseas relative or related entity.
Practical ways the ATO may be able to validate or seek to understand the true substance of the flows from overseas include:
- The ATO can access financial records through Austrac and information on overseas entities through exchange of information agreements with overseas tax authorities
- The ATO will look at unexplained wealth. If there is a disconnect between the amount of income/ profits reported by the Australian taxpayer in their Australian tax returns and the lifestyle of the taxpayer, a broader ATO review is likely, including a review of any funds received from overseas.
- While documenting a loan or gift agreement is important, this is only the start. The ATO will review the facts and circumstances holistically, such as whether the gift or loan arrangement is genuine or commercial, whether the terms of the loan or gift have been properly recorded for accounting purposes, and whether the repayments and tax compliance have been followed through correctly.
- The ATO may require commercially and personally sensitive information from overseas parties. For example, the ATO may require commercially and personally sensitive information of the donor or lender, such as bank statements, evidence that the funds are from the donor or lender, and a copy of their photo ID or passport.
The ATO is significantly resourced and has had years of experience reviewing the tax implications of funds received from overseas. Therefore, the best time for tax planning is before accepting a gift or loan from overseas to ensure that appropriate tax advice, planning, documentation and post-implementation processes are understood.
To the extent that a taxpayer is unsure about whether their existing affairs are compliant, a review is recommended to understand and explain any risk areas, and to consider appropriate tax planning strategies.
This can include sourcing further evidence or making a voluntary disclosure to the ATO, which can mitigate against the substantial penalties, time, costs and angst of a protracted ATO review or audit.
This article was first published in the Summer 2022-23 issue of Financial Times.