Tax Avoidance and Planning Schemes
The difference between tax evasion and tax avoidance is not always clear, but the difference is this.
Tax avoidance is where structures are set up to route money through low tax routes, or attempting to take advantage of unintended benefits that are quite legal, yet not part of the original aims of the legislators.
This can be legal, it is often illegal. The practice is often pretty devious but goes unpunished by a tax office that knows that a loophole probably does exist.
Some scheme promoters prey upon people who want to ‘make a difference’ by offering tax avoidance schemes including the use non-arm’s length financing to make artificially inflated donations to charities. Middle to higher income individuals are usually the target of promoters of these schemes.
Not All Tax Avoidance Schemes Are Obvious
Many look legitimate and successfully convince taxpayers and sometimes their advisers that they will deliver the promised tax consequences. Only on close examination do higher risk features start to appear.
Nowadays, tax avoidance through the use of planning schemes has become much harder to achieve. The ATO is a much sleeker animal than it used to be, with the government body on the lookout for ‘tax schemes’ where the intention is to avoid of defer tax obligations.
Laws introduced in 2006 to deter scheme promoters mean that marketing tax avoidance schemes or misusing product rulings carry severe penalties for promoters. Also, today taxpayer alerts and product rulings provide better information and protection for investors.
One of the ways that a court decides if a practice is tax avoidance or just benign tax planning is to examine the transaction to see if it makes commercial sense, as opposed to merely being primarily driven by tax considerations.
Avoidance is creative accounting, the attempt to exploit loopholes in law and to throw up a whole bunch of red herrings and complicated, somewhat opaque corporate structures so as to perhaps minimize tax by sleight of hand, or exploiting gaps in accounting rules. Evasion is straight out fraud.
Always seek independent advice from your accountant or contact the Australian Tax Office as to whether the tax benefits promised are actually available.