Documenting gifts and loans from related parties

In a recent article on The onus of proof and substantiation, we discussed how it is the taxpayer that has the onus of proof where they believe an amended assessment or default assessment issued by the Commissioner is excessive. In that situation, it is the taxpayer that must, on the balance of probabilities, prove that the assessment is excessive and show what the assessment should have been.

Disputes with the ATO

Loans and gifts from family members are one area that is repeatedly the source of disputes with the ATO. When the ATO is trying to determine if a taxpayer has not declared income by examining the sources of deposits in the bank account, taxpayers will often say deposits that are not from business operations relate to gifts or loans from family members or related parties.

Unsurprisingly, family members often do not think to document these types of transactions. But it is recommended that they do so as it may reduce the risk of a dispute with the ATO and the possibility of amended or default assessments such as in the recent case of Commissioner of Taxation v Liang [2025] FCAFC 4 where the taxpayers unsuccessfully argued significant funds were loans or equity contributions from their parents but had no evidence to support this contention.

ATO guidance

The ATO has issued a Taxpayer Alert TA 2021/2 Disguising undeclared foreign income as gifts or loans from related overseas entities and has a page on its website dealing with  gifts or loans from related overseas entities where it provides examples of the types of supporting documents that should be maintained.

While the ATO guidance focusses on gifts and loans from related overseas entities, many of these examples are also relevant to domestic groups and transactions.

ATO examples of supporting documents for gifts

According to the ATO, supporting documents for gifts from related entities overseas can include:

• any contemporaneous declarations the donor has made in their country of residence about the nature of the amounts transferred;
• an executed contemporaneous deed of gift prepared by the donor;
• formal identification of the donor, such as a copy of their photo identification from their passport or identity card;
• a certified copy of the donor’s will or distribution statement for the estate;
• a copy of the donor’s bank statements showing the gift and the donor’s wealth before they made the gift; and
• financial records reflecting the donor’s transfer.

ATO examples of supporting documents for loans

The ATO’s recommendation for supporting documents for loans include:

• a properly documented loan agreement including the terms and conditions of the loan;
• correspondence relating to the loan, including pre-contractual negotiations as to the terms and any variations made post agreement;
• documents about any security provided or guarantees given;
• facility arrangements governing the draw down and transmission of funds;
• financial records such as bank statements showing the advance of funds and subsequent repayments, including interest and principal payments over the loan term;
• financial and accounting records that show how the loan amounts were used;
• account statements or accounting records and ledgers reflecting the loan balance outstanding and financing costs incurred or paid;
• any declarations the lender has made in their country of residence about the provision 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 showing payment of withholding tax; and
• financial plans, cashflow forecasts, net assets position or budgets showing an intention or capacity to repay the loan.

Documentation and accounting records

It is also important that the entity’s financial accounts reflect the relevant documentation. The entity’s accounts only record the entity’s transactions and in the absence of proper documentation are unlikely to be sufficient for the ATO to accept the taxpayer’s characterisation of the amounts.

If you have any questions regarding the above, or need assistance with an ATO review or audit, please contact us.