The Tax Commissioner has successfully argued that more than $1.6m in a couple’s bank account is assessable income and not a gift from friends or a loan.

It is enough to make a movie about Rusanova, and the Commissioner of Taxation. The story revolves around a Russian couple living in Australia who were ‘gifted,’ with over $1.6m of unexplained deposits and over $67,000 in interest. Also, there is the Russian father-in-law, who exports seafood and operates a number of Australian companies.

What is at stake in the Federal Court case? Can you prove to the Australian Tax Office that unaccounted for deposits should be treated like gifts or loans, and what happens if the Tax Commissioner disagrees? The Commissioner can decide to issue a default assessment and determine the tax due if he suspects that the deposits are income. It is the taxpayer’s responsibility to prove that the Tax Commissioner was wrong.

Unaccounted deposits

An Australian husband and wife deposited an estimated $1,636,000 into their respective bank accounts between 2012 and 2016. ATO was curious to learn that neither spouse had filed a tax return, believing they had no income.

The money deposited was, they claimed, a gift of the father of the wife and, therefore, not assessable. It was curious that no documents were produced to prove the deposits, and there wasn’t a single email or text confirming receipt or stating money had been sent.

A friend of the family also deposited money in the husband’s bank account, including a series $20,000 transactions spread over a period of about a week. The friend claimed that these were interest-free loan with no agreed conditions but the expectation of repayment. The friend did not recall how he had been asked to make the loan and no documents, emails or texts were disclosed to back up the loan. 

There was evidence that the husband had ‘repaid’ more than what had been borrowed at the same time the loans were advanced. Documents also show that the husband sent a Porsche Cayenne, allegedly as repayment for the loan, to a friend in Russia.

The husband held four directorships in Australian companies, but none had filed tax returns. One of the businesses was a wholesaler of seafood, which distributed the products of his father in law’s American-registered Russian export company. The son-in law stated that, between 2010 and 2016, he had been trying to grow his father’s Russian export company without receiving any compensation.

Tax Commissioner to be Contested

In 2017, ATO assessed the couple’s income tax liability using entries from their bank accounts. The ATO then issued a default assessment on the basis of the unaccounted-for deposits and expenses. The couple raised objections to the assessment, and these were partially allowed. The couple then received a second assessment, to which they again objected at the Administrative Appeals Tribunal.

The couple has a problem. Genuine gifts of money do not fall under the ATO’s tax laws, but the taxpayer must prove to the ATO that it is a genuine gift. The AAT ruled that “absent reliable evidence …,, there is no basis for making any determinations as to whether or not the deposits are part of the applicants taxable income.”

The AAT rejected the couple’s claim that the deposits were either gifts from the father or loans from a friend, despite the fact that an affidavit was signed by the husband’s dad stating the amounts transferred were gifts. The couple failed to provide evidence of their actual income to show that the Tax Commissioner’s assessment is unreasonable. They also could not prove that the gifts they received were gifts from the wife’s father.

The Federal Court dismissed with costs the appeal of the couple and left the default tax assessment by the Tax Commissioner in place.

Gift tax traps: How to avoid them

Gifts of money or assets are generally exempt from tax if they are given freely, no return is expected, and there is no material benefit to the giver.

Taxes may be applicable in certain circumstances.

Gifts from an overseas trust

You may need to declare some amounts that were paid to you or applied to your benefit if you are an Australian resident and a beneficiary of a trust abroad. It doesn’t matter if you weren’t the beneficiary directly. For example, you may have received money as a gift from a relative who had received it through a foreign trust. This includes cash, loans and shares.

Inheritance

In most cases, money or property that you inherit from an estate of a deceased person is not taxed. Capital gain tax may apply in certain circumstances when disposing of an inherited asset. If you inherit your parent’s house, for example, CGT does not generally apply in the following circumstances:

• Their main residence was the property;
• You can claim your parents as Australian residents in tax terms.
• You can sell your property in 2 years.

CGT may apply, however, if:

• If you sell the home of your parents more than two years after inheriting it, or
• You inherit a property that was not your parents main residence
• Your parents weren’t Australian tax residents when they died.

The tax implications of an inheritance are complex and can quickly become overwhelming. 

Contact Bates Cosgrave team for help when you are planning your estate for maximum benefit to your beneficiaries or managing the tax arrangements of an inheritance. When drafting or updating your will, these issues are not always taken into consideration.