20 September 2021

Australian resident taxpayers that derived income or capital gains from overseas but did not declare it in their income tax returns are the focus of a Taxpayer Alert TA 2021/2 issued by the Australian Taxation Office (ATO).

An individual who is an Australian resident for tax purposes must pay Australian tax on worldwide income (i.e. income from both Australian and foreign sources). Australian tax residency is determined by applying a variety of different tax residency tests[1] and is independent from the nationality displayed on a passport.

TA 2021/2 warns Australian resident taxpayers not to avoid or evade tax on their foreign assessable income by disguising the funds received as a gift, or a loan, from a related overseas entity. The ATO is also concerned that such fake loans may be used to claim deductions for interest that was never incurred.

The ATO is currently undertaking reviews and audits on such tax avoidance schemes and is using data from various sources (e.g. exchange of information powers from double tax agreements (DTAs), data on movements of funds into Australia from Australian Transaction Reports and Analysis Centre (AUSTRAC), and data from the Common Reporting Standard and the Foreign Account Tax Compliance Act) to identify such schemes.

Foreign assessable income that are not declared can include:

• Actual amounts of foreign assessable income (e.g. income from employment, interest, dividends or capital gains on disposal of overseas Capital Gains Tax (CGT) assets).

• Deemed amounts of foreign assessable income (e.g. amounts assessable under the controlled foreign company (CFC) or transferor trust provisions).

• Amounts assessed under the deemed dividend provisions (e.g. s47A or Division 7A) or amounts from trusts assessable under s99B.

Examples of such repatriation schemes are when:

• A related overseas entity (e.g. a family member, a friend or an associate such as a related company or trust) transfers funds either:

• • directly to the individual resident taxpayer (or an associate) or through an offshore financial intermediary;

• • as a single lump sum or in instalments;

• • in the income year in which it is derived, in a later income year or over several years.

• The repatriation is disguised as a gift or loan that lacks commercial explanation or relates to foreign assessable income that has not been declared in Australian tax returns.

One example of such a repatriation scheme is where round robin-arrangements are used to repatriate money made overseas back to Australia through a loan from a related party.

What does this mean for you?

This area is of specific concern for high wealth individuals deriving income from all over the world – an area the ATO is particularly interested in.

If such schemes are detected by the ATO, the consequences are severe. The ATO can tax the whole amount of the purported loan or gift as assessable income, impose significant penalties (e.g. 90% of the tax liabilities) and initiate criminal prosecution for such behaviour.

However, an individual resident taxpayer who can prove that funds from a related overseas entity are a genuine gift or loan, will not have to include these amounts in assessable income[2].

This will usually be the case where:

• The characterisation of the transaction as a gift or loan is supported by appropriate documentation;

• The parties’ behaviour is consisted with that characterisation; and

• The funds provided are sourced from funds genuinely independent of the taxpayer.

Appropriate documentation to evidence a genuine gift will include:

• A contemporaneous Deed or Gift;

• Evidence showing the donor’s capacity to make the gift from their own resources; or

• Financial records showing the donor’s transfer.

Appropriate documentation to evidence a genuine loan will include a properly documented loan agreement setting out the:

• Parties to loan agreement;

• Terms and conditions of loan agreement.

If you have received income from foreign sources or have received a loan or gift from a related party, please speak to your Findex adviser or get in touch with the Tax Advisory team so that we can assist you in determining whether such income should be assessable in Australia. If you haven’t declared your foreign income, we may be able to assist you with making a voluntary disclosure to seek to limit any penalty exposure.

[1] The resides test, domicile and permanent place of abode test, more than 183 days test and Commonwealth Superannuation test.

[2] However, there may be other Australian tax consequences (e.g. s99B of the Income Tax Assessment Act 1936 may apply if gift or loan amounts are paid through trusts).