ATO Concerns on Undeclared Foreign Income
Taxpayer Alert TA 2021/2
The ATO issued TA 2021/2 last month in which taxpayers are warned not to disguise assessable foreign income as a gift or a loan received from a foreign entity. The Taxpayer Alert also expresses the ATO’s concerns that purported loans may be used to claim deductions for interest never incurred.
The arrangements that the ATO is particularly focused on involve the following:
- An Australian taxpayer derives foreign assessable income and does not declare this in their Australian income tax return;
- The foreign assessable income is repatriated to Australia to the taxpayer or an associate. The repatriation is achieved by a related overseas entity either directly, or through an intermediary, transferring the funds to the taxpayer or an associate in Australia.
- The true character of the funds is concealed upon its repatriation to Australia as a gift or a loan.
The ATO is currently undertaking reviews and audits on such tax avoidance schemes and is using data from various sources, data on movements of funds into Australia from AUSTRAC and data from the Common Reporting Standard and the Foreign Account Tax Compliance Act to identify such schemes.
The ATO has warned that taxpayers and also their advisers who enter into such arrangements will face severe penalties, including sanctions under criminal law. With the ATO issuing the Taxpayer Alert expressing its concerns, it is particularly important for tax agents to make proper enquiries by way of requesting documentation to support the nature of inbound transactions.
The Taxpayer Alert provides some guidance on appropriate documentation to support that transactions are either loans or gifts.
Appropriate documentation for a genuine loan would typically include a properly documented loan agreement that evidences the parties to the loan, its terms and relevant conditions. The ATO would also expect there to be financial records showing the advance of funds and repayments of principal and interest.
Appropriate documentation for a genuine gift will depend on the size of the gift and whether the nature of the relationship is one where gifts might be made in the ordinary course of that relationship. For larger gifts, this could include a contemporaneous deed of gift. Further, the ATO would also expect there to be evidence showing the donor’s capacity to make the gift from their own resources as well as financial records reflecting the donor’s transfer.
While the Taxpayer Alert provides some guidance on appropriate documentation, obtaining documentation to evidence a gift could be particularly problematic, as the donor may not wish to disclose their financial position to demonstrate their capacity to make the gift. In such circumstances, clients should be made aware of the ATO’s increased scrutiny of overseas transactions and likely investigations resulting from this.
If you have any queries in relation to the above, please contact Gaurav Chitnis.