The ATO is also concerned that such purported loans may be used to claim deductions for interest that was never incurred.

According to the ATO, omitted foreign income may include overseas employment or business income, interest from foreign financial institutions or loans, dividends from foreign companies, a capital gain on the disposal of a foreign asset, or deemed amounts of foreign income in relation to interests in foreign companies or trusts.

To combat such arrangements, the ATO has begun using its exchange of information powers to gather information from other countries, and data from the Australian Transaction Reports and Analysis Centre (AUSTRAC) that identifies movements of funds into Australia.

The Common Reporting Standard (CRS) also provides the ATO with shared data on financial account information of foreign tax residents with over 65 foreign tax jurisdictions across the globe.

The Tax Office has urged taxpayers who have entered into such arrangements to come clean, warning that taxpayers and their advisers who are found guilty of entering such arrangements are likely to face substantial penalties, including sanctions under criminal law.

“We are currently reviewing these types of arrangements and actively engaging with taxpayers who have entered such arrangements to ensure that they pay the correct amount of tax,” said the ATO.

“We are issuing this Taxpayer Alert to warn and deter taxpayers and advisers from entering these arrangements.

“Taxpayers who have not derived any foreign income and have received a genuine gift or loan from a family member overseas should not be concerned.

“However, those taxpayers deliberately omitting foreign income, concealing their interests in foreign assets or making false claims for deductions in their tax returns will face substantial penalties, including possible sanctions under criminal law.”