When gifts are taxed
It is important to note that there are certain situations where the Australian Taxation Office (ATO) will consider a gift to be assessable income or subject to capital gains tax (CGT):
Business Transactions
If the gift is made as part of a business transaction or commercial arrangement, it is seen as assessable income and subject to income tax. For example, if a business owner transfers money or assets to another person to disguise business income or avoid tax obligations, this will not be classed as a genuine gift.
Income Generating Assets
If the gift involves income generating assets, such as rental properties, shares, or investments, any income generated from those assets after the transfer is subject to income tax.
Assets Subject to CGT
If the gift involves the transfer of assets that are subject to CGT, such as real estate, shares, or cryptocurrencies, the recipient is liable for CGT when they sell or dispose of those assets in the future. The CGT is normally calculated based on the market value of the assets at the time of the gift.
Personal Services Rendered
If the gift is given in exchange for personal services rendered, such as providing professional services or performing work, the ATO considers it as assessable income for the recipient.
Gift of Money
Money received as a gift is not part of the recipient’s assessable income and must not be declared for tax purposes. However, any income generated from the gifted money, such as bank interest, becomes part of the recipient’s assessable income and may be subject to income tax.
Gifts from Overseas
For income tax purposes, gifts from foreign residents are treated the same as gifts from Australian residents. Once the recipient owns the gifted money or asset, any income generated from it will be subject to tax.
Income Splitting
If a gift is made to split income with a family member or entity to reduce tax obligations, the ATO assesses it differently. Income splitting refers to arrangements diverting income to a lower income individual or entity for tax advantages.
Loan Forgiveness
If a loan is forgiven by the lender as a gift, the forgiven amount may be considered as assessable income for the borrower. This applies when there is no intention or expectation of repaying the loan.
Prearranged Agreements
If there is an understanding or prearranged agreement between the donor and recipient that the gift will be used to provide a benefit back to the donor, the ATO views it as assessable income rather than a genuine gift.
Disguised Income
If a gift is given to disguise or reclassify income to avoid tax obligations, the ATO will treat it as assessable income.
It’s important to keep in mind that the above situations are not typical for most personal gifts between family members or friends without any underlying commercial or tax avoidance motives. Tax free gifting by means of genuine, voluntary gifts is perfectly acceptable.
