When is a gift not a gift?

Navigating the complex world of tax compliance can feel daunting, especially for trade and maintenance franchises in their early years of operation. The recent Federal Court case of Rusanova and the Commissioner of Taxation serves as a cautionary tale for small business owners. With over $1.6 million in unexplained bank deposits labeled as assessable income - not gifts or loans - the couple faced a hefty tax bill.

Here’s what you need to know to avoid falling into similar tax traps and keep your finances on track.

Understanding gift tax rules

A monetary gift from an individual is generally not taxable if it is voluntary, unconditional, and provides no material benefit to the giver. However, complications can arise in certain scenarios, including:

• Gifts from a foreign trust: If you’re a tax resident in Australia and receive funds from a foreign trust - directly or indirectly - it may need to be declared as income. This applies to cash, loans, land, shares or other assets.

• Inheritance complications: Inheritances are typically not taxed. However, capital gains tax (CGT) can apply if you dispose of an inherited asset under certain conditions, such as selling it beyond the two-year exemption period or if the inherited property wasn’t a primary residence.

• Asset gifting doesn’t avoid tax: Gifting or donating assets doesn’t exempt you from CGT. For instance, if parents gift a block of land to their child, the ATO may assess CGT based on the market value of the land at the time of the gift—even if no money was exchanged. The same applies to donations of cryptocurrency.

Why these rules matter to your business

As a trade business or maintenance franchise owner, your cash flow and compliance with tax regulations are critical to sustaining and growing your business. Missteps with gifts, loans, or inherited assets can create unexpected tax liabilities, draining your profits and complicating your financial planning.

Take proactive steps to manage your tax obligations:

1. Keep clear documentation of any gifts, loans, or assets received.

2. Understand how CGT applies to any property or assets you plan to transfer.

3. Consult a tax professional to address complex situations, like foreign trusts or inheritances.

Set your business up for success

Understanding the tax implications of every financial decision is key to building a thriving business. That’s why the AccNav Small Business Foundations Course and Ultimate Bookkeeping Series are designed specifically for trade and maintenance franchises like yours.

These comprehensive programs will help you:

• Master tax compliance and reporting.

• Maximise your savings and profits.

• Develop a clear strategy for sustainable growth.