The ATO has recently issued Taxpayer Alert 2021/2 titled “Disguising undeclared foreign income as gifts or loans from related overseas entities.”
The ATO is concerned about Australian taxpayers not disclosing as assessable income, funds received from overseas where they are purported to be gifts or loans.
The examples used in the Taxpayer Alert includes Australian taxpayers disguising foreign capital gains, foreign income or repatriation of profits from a foreign entity as a gift or loan from a related overseas entity.
The Taxpayer Alert is intended to clearly warn taxpayers and advisors that any arrangements done to artificially avoid recognising assessable income in Australia can result in significant penalties (up to 90% plus shortfall interest). The ATO also warns taxpayers and their advisors face risk of criminal prosecution and penalties under criminal law.
Our key insights that can be taken away are as follows:
- The Taxpayer Alert should be taken seriously. The ATO is not only warning of their concerns, but highlighting their significant resources and data matching capabilities to cross reference any statements or positions provided by the taxpayer to the ATO. For example, the ATO can access financial records through Austrac and information on overseas entities through Exchange of Information Agreements with overseas tax authorities;
- The ATO is concerned about unexplained wealth. Based on our experience, if there is a disconnect between the amount of income / profits recognised by the Australian taxpayer in their Australian tax returns and the lifestyle of the taxpayer, a broader ATO review is likely which would include reviewing any funds received from overseas;
- Whist 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 (i.e. reviewing all facts and circumstances for both personal and business reasons), whether the terms of the loan or gift have been properly recorded for accounting purposes and whether repayments / commercial and tax compliance has been followed through correctly;
- The ATO may require commercially and personally sensitive information from overseas parties. Of significant concern, is that the ATO has indicated that they may require commercially and personally sensitive information of the donor or lender such as bank statements, evidence that the funds are from the donor / lender and photo ID / passport. We consider that if someone is truly an independent party from overseas and providing a genuine gift or commercial loan, a key consideration is whether it is reasonable, practical or even possible to obtain this level of information.
The ATO is significantly resourced and has had years of experience reviewing these matters and understanding the different structures that may be put in place by taxpayers.
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 a taxpayer is unsure about how their existing affairs are compliant, an independent review is recommended to understand and explain any risk areas and consider appropriate tax planning strategies including sourcing further evidence and / or making a voluntary disclosure to the ATO. A voluntary disclosure can mitigate against substantial penalties, time, cost and angst of a protracted ATO review or audit.