Can I use a gift or loan abroad to support financial activity? ATO tips for covering your bases
Recently, the ATO has focused on combating practices where unreported foreign income is disguised as gifts or loans to avoid paying taxes in Australia.
But what about genuine gifts or loans from related foreign entities that are used to finance business or financial activities? Will that put you on the ATO radar?
ATO describes the Key considerations and what you need to do to protect yourself.
Genuine gifts or loans from related foreign entities
A “related foreign entity” generally refers to a family member, friend or associate who is located abroad. An example of a gift from a related foreign entity is an heirloom from a family member who lives in a foreign country.
Given the ATO’s increased attention in this area, you may be wondering if it is legal to use this money to fund business structures or to acquire income producing assets. The key is to make sure that the donation or loan is authentic, and that you keep appropriate documentation.
What is an “authentic” donation or loan?
The ATO declares that a genuine gift or loan is one where:
- The qualification of the transaction as a grant or a loan is supported by appropriate documentation,
- The behavior of the parties conforms to this qualification, and
- The sums provided come from funds that are truly independent of you.
Document genuine gifts from related foreign entities
Documents to support a real gift used to finance your business or to acquire income producing assets include:
- An executed deed of donation prepared by the donor.
- Formal identification of the donor.
- A certified copy of the donor’s will.
- A copy of the donor’s bank statements showing the donation.
- Financial documents reflecting the transfer from the donor to you.
Document genuine loans from related foreign entities
Supporting documents for a genuine loan used to support a business or financial activity include:
- A properly documented loan agreement.
- Correspondence relating to the loan.
- Financial documents such as bank statements showing the advance of funds and subsequent repayments, including interest and principal payments.
- Financial and accounting records that show how you used the loan amounts.
- Foreign bank account statements reflecting loan transactions.
What if the ATO doubts the authenticity of a gift or loan?
If there is any doubt as to the authenticity of a donation or loan, the tax commissioner will form an opinion on the basis of all the available evidence.
For example, a deed of gift may not necessarily be accepted as conclusive evidence that a receipt has the character of a genuine gift.
In proving that a loan is genuine, documentation from unrelated parties such as financial institutions often provides the best proof that an amount has been received as a genuine loan.
Key points to remember
The ATO is cracking down on Australian resident taxpayers who try to avoid paying taxes in Australia on foreign sources of income, by disguising the funds as a gift or loan. This may raise concerns among law-abiding taxpayers who receive genuine gifts or loans from related foreign entities and use them to finance business structures or to acquire income-producing assets. If such a gift or loan is indeed genuine, as defined by the ATO, it will be prudent to ensure that you retain the appropriate supporting documentation.