The Australian Taxation Office (ATO) is planning to boost efforts to review Australian resident taxpayers who attempt to conceal income from foreign sources due to an observed increase in such activity.
The ATO has released an alert to taxpayers on ‘Disguising undeclared foreign income as gifts or loans from related overseas entities’ which continues the ATO’s long-running effort to battle undisclosed offshore income.
Their focus is on the strategies being employed by taxpayers to evade their tax obligations, including by concealing foreign assessable income under the appearance of a gift or loan from a foreign entity.
According to the ATO, omitted foreign income may include overseas employment or business income, interest from foreign financial institutions or loans, dividends from foreign companies, a capital gain on the disposal of a foreign asset, or deemed amounts of foreign income in relation to interests in foreign companies or trusts.
The ATO is undertaking reviews and audits of this category of tax evader, based on rich data now available to it from a variety of sources including the following: information exchanges afforded through double tax agreements, AUSTRAC data on movements of funds, and data extracted under the Common Reporting Standard and the US Foreign Account Tax Compliance Act.
The ATO has eyes and ears on the ground across the globe that assists them to identify, at a granular level, all funds that have been transferred into Australia from offshore.
The alert confirms that taxpayers who have not derived any foreign income and have received a genuine gift or loan from a family member overseas should not be concerned.
However, the ATO qualifies that exclusion by stating that “a genuine gift is one where, among other things, the gift or loan is supported by appropriate documentation”.
Warnings from the ATO
The Tax Office urges any taxpayers who have entered such arrangements or activities to come clean, warning that taxpayers and their advisers who are found guilty of entering such arrangements are likely to face substantial penalties, including sanctions under criminal law.
The alert provides some information on what the ATO considers to be “appropriate documentation”, which varies depending on the size of the gift and the nature of the relationship between the parties.
For a genuine loan, the ATO expects that there would be a “properly documented” loan agreement, and that principal and interest are repaid over time.
The ATO is quite content to put the burden of proof on taxpayers that an amount transferred is a “genuine gift” or a “genuine loan”, failing which the amount is simply treated as ordinary income.
If the transfer of funds from overseas gives rise to a genuine suspicion that tax on foreign gains has been evaded, then that conduct ought to be investigated to ensure that any under-reported gains are brought to tax.
The legal necessity of the documentation expected by the ATO and the requirement for ongoing interest and principal to be repayable on a loan is debatable, and hopefully the ATO will keep in mind the distinction between prudent record keeping and the requirements of the law.
The team here at MWM Advisory are available to discuss with clients, so please get in touch.