When Is A Gift Not A Gift?

The Tax Commissioner has successfully argued that more than $1.6 million deposited in a couple’s bank account was assessable income, not a gift or a loan from friends.

The case of Rusanova and Commissioner of Taxation is enough for a telemovie. The plot features an Australian resident Russian couple ‘gifted’ over $1.6 million in unexplained bank deposits, over $67,000 in interest, the Russian father-in-law seafood exporter, a series of Australian companies, and the generous friend loaning money in $20,000 tranches.

The crux of the case before the Federal Court is whether you can convince the Australian Tax Office (ATO) that unexplained deposits are actually gifts or loans, and what happens if the Tax Commissioner disagrees. If the Commissioner suspects the deposits are income, he can issue a default tax assessment and determine the amount of tax you owe. The burden of proof is then on the taxpayer to prove the Tax Commissioner wrong.

The unexplained deposits:

Between 2012 and 2016, an Australian resident couple had an estimated $1,636,000 deposited into their bank accounts. The ATO became curious when neither spouse had lodged tax returns in the mistaken belief that they had not earned any income.

The money deposited, they said, was a gift from the wife’s father and therefore not assessable income. Curiously, there were no records produced to support the deposits. Also, not a single text or email notifying that money had been remitted, or acknowledging its receipt.

A friend of the couple deposited money into the husband’s account, including a series of $20,000 transactions over about a week. The friend claims these were interest-free loans with no formal terms, but with an understanding they would be repaid. He couldn’t recall how the husband requested the loans, and he didn’t provide any loan documents, emails, or texts to support the claim. Around the same time the loans were made, evidence shows the husband repaid amounts exceeding what was lent. Documents also show he transferred a Porsche Cayenne to his friend in Russia, allegedly as loan repayment.

Contesting the Tax Commissioner

In 2017, a covert tax audit utilised entries in the couple’s bank accounts to assess their income tax liability and the ATO issued a default assessment based on the unexplained deposits and expenses.The couple objected to the assessment, and the ATO partly allowed their objection. The ATO then issued a second assessment, which the couple again challenged before the Administrative Appeals Tribunal (AAT), arguing that it was excessive.

Can the Tax Commissioner really decide how much tax you should pay?

The Tax Commissioner has the power to issue a ‘default assessment’. This is for the amount he believes is owing from overdue tax returns or activity statements. The Tax Commissioner makes the assessment based on the amount they believe is owing, not what has been declared.

The problem with a default assessment is not just the Tax Commissioner deciding how much tax you should pay. The ATO may add an administrative penalty of 75% of the tax-related liability for each default assessment it issues. In some cases, it can increase this penalty to 95% if the taxpayer has a history of non-compliance.

But, here is the problem for the couple. While genuine gifts of money are not taxable, the burden is on the taxpayer to prove that the gift is truly a gift, if the ATO asks. The Adiminstrative Appeals Tribunal (AAT) held that, ‘absent any reliable evidence…, there is no proper basis to make any findings as to whether the deposits constitute part of the applicants’ taxable income or not’.

The Tax Commissioner can rely on a ‘deficiency of proof’.

The couple’s stance that the deposits were either gifts from the father or loans from a friend were rejected by the AAT. This is despite an affidavit and evidence from the wife’s father stating that the amounts transferred to them were gifts. The couple did not demonstrate what their income actually was to prove the Tax Commissioner’s assessment was unreasonable. They could not substantiate that the gifts were indeed gifts from a very generous father.

The Federal Court dismissed the couple’s appeal with costs, leaving the Tax Commissioner’s default tax assessment and penalties in place.

Avoiding the gift tax trap.

A gift of money or assets from an individual is generally not taxed if:

The gift is given voluntarily,
Nothing is expected in return, and
The gift giver does not materially benefit.

However, there are some circumstances where tax might apply.

Gifts from a foreign trust.

If you are a tax resident of Australia and the beneficiary of a foreign trust, it’s possible that at least some of the amounts paid to you (or applied for your benefit) will need to be declared in your tax return. This applies even if you were not the direct beneficiary of the foreign trust. For example, a family member received money from a foreign trust and then gifted it to you. This applies to cash, loans, land, shares, etc.

Inheritances.

Money or property you inherit from a deceased estate is often not taxed. However, there are circumstances where capital gain tax (CGT) might apply when you dispose of an asset you inherited. For example, if you inherit your parents’ house, CGT generally does not apply if:

The property was their main residence; and
Your parents are Australian residents for tax purposes; and
You sell the property within 2 years.

However, CGT is likely to apply if for example:

You sell your parents former main residence more than 2 years after you inherit it; or
The property you inherit was not your parents’ main residence; or
Your parents were not Australian tax residents at the time of their death.

Managing the tax consequences of an inheritance can become complex quickly. Please contact our Aintree Group Legal team for assistance when planning your estate. These issues are often not taken into account if you are drafting or updating a will.

Gifting an asset does not avoid tax.

Donating or gifting an asset does not avoid CGT. If you receive nothing or less than the market value of the asset, the market value substitution rule might come into play. The market value substitution rule can treat you as having received the market value of the asset you donated or gifted when calculating any CGT liability.

For example, imagine if Mum & Dad buy a block of land and then eventually gift the block of land to their daughter. The ATO will look at the value of the land at the point they gifted it. If the market value of the land is higher than the amount that Mum & Dad paid for it, then this would normally trigger a CGT liability. It does not matter that Mum & Dad did not receive any money for the land. Mum & Dad might have a CGT bill for land they gifted with nothing in return.

Donations of cryptocurrency might also trigger CGT. If you donate cryptocurrency to a charity, you are likely to be assessed on the market value of the crypto at the point you donated it. You can only claim a tax deduction for the donation if:

The charity is a deductible gift recipient, and
The charity is set up to accept cryptocurrency.

The moral of the story: It is always important to always consult your professional advisers before gifting or receiving a sum of money. This ensures you will have proof that it is a gift and not income if an ATO audit was to occur.

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.