When is a gift not a gift?

Taxpayer unsuccessful in arguing that the deposits received were gifts and loans

The Federal Court in Rusanov v Commissioner of Taxation [2024] FCA 777 considered whether certain deposits into the taxpayer’s bank account were genuine gifts or loans.

The Tax Commissioner has successfully argued that more than $1.6m 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 $1.6m 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 prove to the Australian Tax Office (ATO) that unexplained deposits should be treated as gifts or loans and what happens when the Tax Commissioner thinks otherwise? If the Commissioner suspects the deposits are income, he can issue a default tax assessment and decide what tax should be paid. The burden of proof is then on the taxpayer to prove the Tax Commissioner wrong.

The taxpayers received significant deposits into their bank account over a number of years which were not disclosed as assessable income in their respective tax returns. The ATO subsequently commenced an audit leading to a default assessment, which treated these deposits as assessable.

While the taxpayers argued that the deposits were non-assessable gifts from their father or otherwise loans from a friend, they were unsuccessful at the AAT. This was mainly because the AAT considered that the taxpayers had not discharged their burden of proof that the ATO’s default assessments were excessive, which ultimately requires the taxpayers to prove what their actual taxable income was in those years.

Subsequently, the taxpayer appealed to the Federal Court and argued that they had produced and relied on evidence consistent with the ATO’s guidelines in relation to documenting gifts and loans from overseas parties. This seemed to include declarations and various statements from the purported lender and donor.

However, the taxpayer was unsuccessful, with the Federal Court ruling in favour of the ATO and ultimately concluding that it was correct for the AAT to come to its original conclusion. This outcome was reached having regard to a number of matters, including:

There were no contemporaneous records to substantiate the payments, including emails or texts acknowledging receipt, which the AAT found implausible;
There was no documentation to evidence any sort of loan agreement, including no payments of interest nor a fixed time to repay the loan; and
The taxpayers were selective in providing evidence, including an absence of evidence regarding companies in which they were directors. It seemed at least one of the companies was related in some way to their father, such that the AAT could not be satisfied that the transfers were not renumeration for services performed by the taxpayers.

In a case like this involving default assessments, it is important to remember that the bar is generally set quite high. This is because taxpayers are required to prove what their actual taxable income was in the relevant years to demonstrate the ATO’s assessments were excessive.

Also, practitioners should be aware of other potential issues when funds are received by Australian clients from overseas related parties, especially when the amounts are sourced from private companies or trusts.

Even though a non-resident company might be based overseas, Division 7A potentially can apply to loans and payments made by these companies to Australian shareholders (or associates of shareholders). This can also potentially apply when the funds pass through an interposed entity. If these rules are triggered then the client could be treated as having received a deemed unfranked dividend.

If any funds are received from a foreign trust, section 99B can potentially apply where they represent income or gains that would have been taxed in Australia had they been derived by a resident of Australia. This can potentially be an issue even where the funds represent profits accumulated from a prior year.

More Information

Rusanov V Commissioner Of Taxation [2024] FCA 777