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Characterisation of inbound foreign funds

Cross-border arrangements that mischaracterise inbound foreign funds provided by non-residents to Australian taxpayers.

Last updated 30 April 2023

Inbound foreign funds of interest

We review cross-border arrangements that mischaracterise inbound foreign funds provided by non-residents to Australian taxpayers.

We are concerned with whether the correct tax characterisation has been adopted for funds received into Australia.

Inbound foreign funds need to comply with relevant tax laws, applicable tax treaties and the factual circumstances such as the underlying transaction, the structure used and the relationship between the relevant parties.

We are concerned that such arrangements may be contrived and unnecessarily complex to reduce or disguise the amount of income tax or withholding tax payable.

Foreign investors investing directly into businesses

Cross-border arrangements mischaracterising the structure used by foreign investors to invest directly into Australian businesses can attract our attention. They typically display one or more of the following features:

  • The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms.
  • The foreign investor either already participates in the management, control or capital of the Australian entity at the time of investment, or starts to participate in the management, control or capital as part of the investment.
  • Financial dealings between resident and foreign resident related parties that do not intend to create legally enforceable obligations or proceed on the basis indicated by the form of the arrangement.
  • The investment has features not consistent with commercial debt or equity investments.
  • The investment may provide the foreign investor with direct exposure to the economic return from a particular Australian business or asset portfolio (whether via trading activities or from the proceeds on disposal).

Loans and gifts

Situations that attract our attention include where there is insufficient substantiation and mischaracterisation of funds received from offshore family and related parties in the form of loans or gifts, see gifts or loans from related overseas entities. We focus on arrangements where Australian resident taxpayers derive income or capital gains offshore and either:

  • fail to declare the foreign income in their tax return
  • conceal the character of the funds upon repatriation to Australia as a purported ‘gift’ or ‘loan’ from a related overseas entity.

Guidance on inbound foreign funds

For more information on mischaracterisation and disguising undeclared foreign income, see:

  • TA 2020/2 Mischaracterised arrangements and schemes connected with foreign investment into Australian entities
  • Division 974 ITAA 1997 Debt and Equity interests
  • TA 2021/2 Disguising undeclared foreign income as gifts or loans from related overseas entities.