Imagine receiving over $1.6 million in your bank account and thinking it’s a generous gift. But what happens when the Tax Commissioner decides it’s actually income, and you’re suddenly facing a hefty tax bill? That’s exactly what happened in the intriguing case of Rusanova and the Commissioner of Taxation. This story has all the elements of a gripping drama – an Australian resident couple with Russian roots, unexplained bank deposits, a seafood exporting father-in-law, and a ‘generous’ friend making loans in $20,000 chunks.
The core issue is whether you can convince the Australian Tax Office (ATO) that these unexplained deposits are gifts or loans. And if the Tax Commissioner suspects otherwise, he can issue a default tax assessment, deciding the amount of tax you owe. The challenge then falls on you, the taxpayer, to prove the Commissioner wrong.
The Unexplained Deposits
Between 2012 and 2016, an Australian couple saw around $1,636,000 deposited into their bank accounts. The ATO’s interest was piqued when it became apparent that neither spouse had lodged tax returns, mistakenly believing they hadn’t earned any income. The couple claimed that the money was a gift from the wife’s father and shouldn’t be taxed – however, no records, texts, emails, or anything else backed up their claim.
Adding to the mystery, a friend of the couple deposited large sums into the husband’s account, including a series of $20,000 transactions over just one week. The friend insisted these were interest-free loans, although no loan documents or communications support this. In fact, at the same time these loans were supposedly being made, there was evidence the husband was ‘repaying’ amounts that exceeded what had been borrowed. There was even a Porsche Cayenne involved, transferred to a friend in Russia, allegedly as repayment for the loan.
To make matters worse, the husband was a director of four Australian companies, all of which had yet to lodge tax returns. One of these companies was a seafood wholesaler, distributing the catch from his father-in-law’s Russian export business. The husband claimed he was helping his father-in-law out without receiving any payment.
Contesting the Tax Commissioner
In 2017, the ATO conducted a covert audit, using the couple’s bank account entries to assess their tax liability. The ATO issued a default assessment based on the unexplained deposits and related expenses. The couple objected, leading to a partial revision of the assessment, but a second assessment was then issued. The couple contested this before the Administrative Appeals Tribunal (AAT), arguing the assessment was excessive.
Can the Tax Commissioner Decide How Much Tax You Should Pay?
Yes, the Tax Commissioner can issue a ‘default assessment’ based on what the ATO believes is owed, not necessarily what you’ve declared. The risk isn’t just that the Tax Commissioner can determine your tax liability; it’s also the potential for an administrative penalty of 75% of the tax-related liability for each default assessment issued. In cases of consistent non-compliance, this penalty could increase to 95%.
For the couple in question, while genuine gifts of money are not taxable, the burden of proof lies with the taxpayer. The AAT noted that without reliable evidence, there’s no basis to determine whether the deposits should be considered taxable income. The AAT rejected the couple’s argument that the deposits were gifts or loans despite an affidavit from the wife’s father claiming the amounts were gifts. The couple couldn’t prove that the gifts were indeed gifts. Thus, the Federal Court upheld the Tax Commissioner’s assessment, leaving the couple with the tax bill and penalties.
Avoiding the Gift Tax Trap
Gifts of money or assets from an individual are generally not taxed if the gift is given voluntarily, with nothing expected in return, and the giver doesn’t materially benefit. However, there are some situations where tax might still apply.
Gifts from a Foreign Trust
Suppose you’re an Australian tax resident and the beneficiary of a foreign trust. In that case, some of the amounts paid to you (or applied for your benefit) might need to be declared in your tax return. This rule applies even if a family member received money from a foreign trust and then gifted it to you, covering cash, loans, land, shares, and other assets.
Inheritances
In most cases, money or property inherited from a deceased estate isn’t taxed. However, capital gains tax (CGT) could apply when you dispose of an inherited asset. For example, if you inherit your parents’ house, CGT generally doesn’t apply if:
- The property was their primary residence.
- Your parents were Australian residents for tax purposes.
- You sell the property within two years.
However, CGT might apply if:
- You sell your parents’ former primary residence more than two years after inheriting it.
- The property you inherited wasn’t your parent’s primary residence.
- Your parents weren’t Australian tax residents at the time of their death.
Managing the tax implications of an inheritance can get complicated quickly. If you’re planning your estate or managing an inheritance, seeking advice to maximise benefits and minimise tax is wise. Contact us for estate planning or navigating the tax consequences of an inheritance.
Gifting an Asset Doesn’t Avoid Tax
Donating or gifting an asset doesn’t automatically avoid CGT. The market value substitution rule might apply if you receive nothing or less than the asset’s market value value. When calculating any CGT liability, this rule treats you as having received the asset’s market value you donated or gifted.
For instance, if parents buy a block of land and then gift it to their daughter, the ATO will assess the land’s market value at the time of the gift. If the land has appreciated in value since the parents bought it, this could trigger a CGT liability, even if the parents didn’t receive any payment for the land. The same applies to cryptocurrency donations; you might be assessed based on the market value of the crypto at the time of donation.
If you need help understanding the tax implications of gifts or navigating the complexities of CGT, don’t hesitate to contact us. We’re here to help you make informed decisions and manage your tax obligations effectively.