Where a loan from a related overseas entity is used to fund a taxpayer’s business or to acquire income producing assets, appropriate supporting documents should be kept by the taxpayer that shows the amount received is a genuine loan.
Supporting documents can include:
🔸 a properly documented loan agreement that details: the parties, date of entry, terms and relevant conditions (including the amount, interest rate, frequency of repayments, repayment calculations, and the term 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 in support of the loan
🔸 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 taxpayer used the loan amounts
🔸 account statements or accounting records and ledgers reflecting the loan balance outstanding and the 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
🔸 foreign bank account statements reflecting the transactions relating to the loan and the lender's ability to make the loan
🔸 financial plans, cashflow forecasts, net assets position or budgets showing an intention or capacity to repay the loan.
(This list is non-exhaustive and whether a document is appropriate will depend on the circumstances of the loan).
The ATO will not necessarily be satisfied that an amount has been correctly characterised as a genuine loan merely because the taxpayer has provided supporting documents.
Should there be uncertainty about whether an amount is a genuine loan (or loans), the ATO:
🔸 will evaluate the taxpayer's evidence together with other available evidence to determine the character of the receipt;
🔸 may also make further inquiries to verify information and documents provided;
🔸 will form a view based on all information and evidence made available to it (not just the evidence provided by the taxpayer). Return to our previous posts to view more commentary on:
o appropriate records for genuine gifts
o taxpayer alerts on gifts and loans from overseas related entities
Should you consider entering into a transaction of this nature, you must seek appropriate advice to ensure that you keep contemporaneous records suitable for your circumstances. The information provided here is not to be relied upon as legal or accounting advice.