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Tax rules around presents received during the holidays are more complex than people might think, according to one HLB Mann Judd director.
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How gifts this Christmas could trigger ATO scrutiny
20 December 2024
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Gifts from overseas relatives this holiday season might come with unexpected tax implications, a tax expert warns, with the ATO increasing scrutiny over undisclosed offshore income.
HLB Mann Judd tax director Helena Yuan said the ATO’s draft guidance suggested gifts originating from foreign trusts or estates could be deemed assessable income if they involved previously untaxed property.
This also extended to trust distributions or inheritances from overseas deceased estates, she said.
“Receiving a Christmas or birthday gift from an overseas relative might seem like a thoughtful present,” she wrote in a recent article on the mid-tier firm’s website.
“However, recent draft guidance from the Australian Taxation Office highlights the situation can be more complex than people might think, particularly when receiving from an overseas trust.”
Yuan pointed to Tax Office material such as TA 2021/2, a taxpayer alert on disguising undeclared foreign income as gifts from related overseas entities, and PCG 2024/3 on receiving payments or assets from foreign trusts under section 99B of the Income Tax Assessment Act 1936.
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According to section 99B, property became assessable income for an Australian resident beneficiary if it was “paid to, or applied for the benefit of” them.
Yuan said that while the section was not limited to foreign income, the guidance suggested the ATO was primarily interested in applying it to untaxed foreign income – a frequent feature of foreign trusts.
As a result, there were “extensive” situations where the ATO could deem a gift as assessable income, with the onus placed on the taxpayer to prove the benefit was exempt.
“This can be challenging, especially when beneficiaries might be unaware are they receiving property or income from a foreign trust, such as distributions from a foreign deceased estate,” Yuan said.
ATO increasing scrutiny
When determining whether a foreign gift of money or property from a relative living overseas was genuine and not assessable income, Yuan said the ATO would focus on the substance of the transaction.
This would require appropriate documentation and evidence of the donor’s capacity to make the gift. “The ATO has access to various data sources, including international funds transfer information and tax information exchange agreements with low-tax jurisdictions.”
Yuan said it was crucial to disclose all overseas assets, with the ATO “increasing its scrutiny over undisclosed offshore income”.
“It also highlights the complexities of dealing with overseas gifts and trusts. People need to be aware of their obligations and ensure they have adequate documentation to support their claims.”
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