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Beware of disguising undeclared foreign income as gifts or loans

Many people living in Australia often have money remitted to them from overseas. Often this money is from relatives, friends or an “entity” to which they have a connection.

However, even if such funds are merely loans or gifts, it’s time to be vigilant and to keep proper records.

The ATO is now actively reviewing these types of arrangements to ensure that the amounts are not “undeclared foreign income” of the recipient that is, otherwise, disguised in the form of a loan or a gift.

In particular, the ATO has said it is now concerned with arrangements where Australian resident taxpayers fail to declare foreign income in their tax returns, and then conceal the character of the funds upon repatriation to Australia by disguising them as a purported “gift” or “loan” from a related overseas entity.

According to the ATO, such related “overseas entities” may include a family member, friend or a related company or trust, while the “omitted foreign income” may include such amounts as:

  • 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 (such as shares in a foreign company)
  • Deemed amounts of foreign income in relation to interests in foreign companies or trusts.

In addition, the ATO said it will be looking at instances where taxpayers may also inappropriately claim tax deductions for “interest” said to have been incurred on purported “loans” from the related overseas entity.

In short, the ATO is on something of a mission to not only warn and deter taxpayers and their advisers from entering such arrangements, but to capture any omissions of undeclared foreign income.

That said, the ATO also emphasised that taxpayers who have received a genuine gift or loan from a family member overseas should not be concerned – provided such transactions are properly documented.

In any event, it’s important to be aware of the serious consequences of deliberately omitting foreign income, concealing interests in foreign assets or making false claims for deductions in tax returns, which include possible sanctions under criminal law.

So if you find yourself in any of these circumstances, perhaps now is the time to seek professional advice and get proper documentation in order – or, if you have omitted income from your tax return, seek an amendment and make a voluntary disclosure to reduce any penalties that may apply.