Genuine gift or loan overview
If you receive a genuine gift or loan from a related overseas entity, such as a family member or friend, you don't have to report it in your tax return as it is not taxable income. However, you do need to be able to prove it is a genuine gift or loan.
The 3 requirements for a genuine gift or loan are:
- you have sufficient and appropriate documents to support your claim
- the actions of everyone involved are consistent with the money being a genuine gift or loan
- the money comes from funds genuinely independent of you.
Keep records that show that the payment is a genuine gift or loan, as we may check this later. If you don't have sufficient documentation, we may treat it as taxable income.
We're concerned that some people describe overseas income as a gift or loan to avoid paying tax.
If you receive money or assets from overseas, it’s important to understand when these amounts are taxable income. See Foreign and worldwide income to understand your obligations for receiving overseas payments that aren't gifts or loans.
In some cases, payments may come from a foreign trust. If you're an Australian resident and receive money or assets from a foreign trust, see Receiving payments or assets from foreign trusts to understand your tax and reporting obligations.
If you receive a loan from a foreign private company because you are a shareholder or associate, Division 7A may apply. See Loans by private companies for information on when these loans are treated as assessable income.
For examples of arrangements that raise concern, see Taxpayer Alert TA 2021/2 Disguising undeclared foreign income as gifts or loans from related overseas entities.
Related party financing arrangements where the terms and conditions are non-arm's length also attract our attention.
Documenting genuine gifts
Supporting documents can include:
- any contemporaneous declarations the donor has made in their country of residence about the nature and purpose of the amounts
- letters, emails, text messages or other communications that show the payment was a gift
- an executed contemporaneous deed of gift prepared by the donor
- formal identification of the donor such as a copy of their passport or identity card
- a certified copy of the donor's will or estate distribution statement
- the donor's bank statements showing the gift was made and that they had the funds available before making it
- financial records showing the transfer from the donor to you.
Keep multiple forms of documentation to support the payment's status as a gift. For example, a deed of gift on its own may not be enough.
Documenting genuine loans
Supporting documents can include:
- a documented loan agreement that details
- the parties to the loan (full names and addresses)
- the date of entry
- its terms and relevant conditions, including the
- amount of the loan
- interest rate payable
- frequency of repayments and how they are calculated
- term of the loan
- communications about the loan, including how it was agreed and any later changes
- documents about any security or guarantees for the loan
- facility arrangements governing the draw down and transmission of funds
- authorisation to access or draw down loan amounts from the lender’s account
- financial records such as bank statements showing the loan payment and repayments, including interest and principal payments over the loan term
- financial and accounting records that show how you used the loan amounts, such as
- ledger and journal entries
- bank statements
- credit card statements
- receipts
- account statements or accounting records and ledgers showing
- the loan balance outstanding
- the financing costs incurred or paid
- any declarations the lender has made in their country of residence about the loan
- emails, text messages or other communications that confirm the lender's intention and the nature of the loan
- statements of assets and liabilities provided to a financial institution
- an extract from the lender's financial and accounting records showing the loan balance outstanding
- foreign bank account statements reflecting the transactions relating to the loan and the lender's ability to make the loan
- documents that show the amount of withholding tax paid from interest payments made to the lender, such as payment records or statements
- financial plans, cashflow forecasts, net assets position or budgets showing an intention or capacity to repay the loan.
Documentation from unrelated parties often provides the best evidence that a payment was received as a genuine loan.
For example, a personal statement of assets and liabilities provided to a financial institution that lists the payment as a loan is stronger evidence than a related-party IOU ('I Owe You') with unclear non-commercial terms.