Gifts or Loans from Overseas

Taxpayers sometimes receive gifts or loans from relatives overseas that are used in their business activities or for personal reasons.. In these situations, it is important for the taxpayer to clearly document the nature of the receipt and any relevant terms in order to ensure appropriate tax treatment and reduce the risk of the amounts being treated as income for the recipient.

In addition to the Taxpayer Alert that has been released in this area (see the separate item below), the ATO has also released some guidance on documenting gifts or loans from overseas related parties.

The ATO indicates that to support the characterisation of a receipt as a genuine gift or loan all of the following need to be considered:

- Whether the transaction is supported by appropriate documentation;
- Whether the parties’ behaviour is consistent with the amount being a gift or loan; and
- Whether there is evidence the receipt is sourced from funds genuinely independent of the taxpayer.

For these purposes the ATO’s guidance indicates that appropriate supporting documents can include:

Any contemporaneous declarations the donor has made in their country of residence about the nature of the amounts transferred;

- A 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 potentially also the source of the funds;
- Financial records reflecting the donor's transfer to the taxpayer.

While the ATO indicates that a deed of gift or statutory declaration might not be accepted as conclusive evidence of the nature of the arrangement on their own, these could still be taken into account in determining the whether the receipt is a genuine gift or loan.

 

Mike you will be well aware from the Wickenby period that the ATO can be very aggressive in claims that sums are gifts, loans and are often happy to consider the unexplained credits as unreported and undeclared income etc. Many wickenby arrangements reclassified funds sent offshore as "loans" when they came back onshore. The fundamental failure was there was no agreement and even unspecified counterparties and nothing was given or received for the loans..... In many cases there was little if any substance. The typical ATO approach can be to consider the bank account and summarise all cedits that are unexplained as undeclared income. Then allow the taxpayer to prove otherwise. Am I mean...prove. The onus is upon the taxpayer to satisfy the Commissioner.

Typically genuine family loans and inheritances or parental gifts are easily evidenced even after the event on enquiry through relevant agencies incl the ATO. When funds go back and forwards with regularity however it can make a matter even worse.