On 17 September 2021, the ATO issued taxpayer alert TA 2021/2: Disguising undeclared foreign income as gifts or loans from related overseas entities. The alert describes the ATO’s concern of Australian resident taxpayers avoiding or evading tax by:
- deriving foreign income or capital gains;
- failing to declare these amounts in their tax returns; and
- concealing the repatriation of these amounts as gifts or loans from related overseas entities.
The alert highlights the ATO’s continued focus on undeclared foreign income.
Undeclared foreign income may include:
- employment income;
- business income;
- capital gains from the disposal of assets (such as shares); or
- deemed foreign income relating to interests in foreign companies or trusts.
Related overseas entities may include:
- family members;
- related companies or related trusts.
The income may be repatriated in the guise of a gift or loan from a related overseas entity in a single lump sum, or in instalments, and in the income year of derivation or over several income years.
If detected by the ATO, taxpayers can expect to be assessed for tax on the undeclared foreign income and face substantial penalties of up to 90% of the tax liabilities assessed in addition to interest charges and possible sanctions under criminal law. The consequences can be severe.
To detect arrangements, the ATO will be using its exchange of information powers to gather information from other countries. It will also use other sources of information, such as: data from the Australian Transaction Reports and Analysis Centre (AUSTRAC) to identify movements of funds into Australia, and data received from the Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA).
What can you do?
The alert highlights the ATO’s continued focus on undeclared foreign income and contrasts with the ATO’s high-profile 2014 amnesty, ‘Project DO IT’, which allowed taxpayers to voluntarily disclose undeclared foreign income in return for generous concessions, including on review periods and penalties.
If you have entered into, or are contemplating entering into an arrangement as described, you should seek professional advice. Let’s have a chat about your circumstances, including whether the alert applies to you and what you can do. For example, it may be appropriate to make a voluntary disclosure as this can result in reduced penalties and interest charges. The circumstances under which the gift or loan is made, including any relevant documentation, should also be reviewed as the ATO will scrutinise whether the gift or loan is genuine, including whether the parties have acted in a way that is consistent with the documentation or whether the terms of the documentation lack commercial explanation.