The Australian Tax Office (ATO) has launched an enforcement drive against residents who fail to declare foreign income in their tax returns and then disguise the character of the funds when repatriating them.
According to the ATO, the concealed foreign income is typically misrepresented as a gift or loan from a related overseas entity such as a family member or friend, or a related company or trust.
The omitted foreign income may include:
- Overseas employment
- Business income
- Interest from foreign financial institutions or loans
- Dividends from foreign companies
- Capital gains on the disposal of a foreign asset such as shares in a foreign company or deemed foreign income in relation to interests in foreign companies or trusts.
Some taxpayers also inappropriately claim tax deductions for interest that they say was incurred on loans from the related overseas entity, says the ATO, which is now reviewing such arrangements. It has issued an alert to warn and deter taxpayers and advisors from adopting them.
Taxpayers deliberately omitting foreign income, concealing their interests in foreign assets or making false claims for deductions in their tax returns will face substantial penalties, including possible sanctions under criminal law, the ATO warns.
The ATO has also published web guidance for taxpayers to document genuine gifts or loans from related overseas entities, where the funds are used for income-producing purposes. 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 if they follow this guidance, it says.
However, where there is doubt, the ATO says it will form its view based on all the available evidence and will not necessarily accept a deed of gift as conclusive evidence that a receipt of funds has the character of a genuine gift.