Tax Planning vs. Tax Evasion – What’s the difference?
The majority of clients seek advice regarding day-to-day business transactions. There is a fundamental difference between tax planning and tax evasion. Tax planning is a legitimate practice aimed to minimise tax liabilities through activities that are allowed under the law; whereas, tax evasion is unlawful. However, the ATO closely examines schemes and arrangements that might comply with the technical requirements of tax law but have a dominant purpose of avoiding tax.
For example, just before the end of financial year a profitable company agrees to accrue the management fee equal to its annual income for receiving management services from a company that is controlled by the same taxpayer. The providing company has not been carrying business during the income year and has carry-forward losses. The only supporting documentation relating to this transaction includes a tax invoice and the journal entries. There is no evidence that the management service has been actually provided. Consequently, it would be difficult to demonstrate that the taxpayer acted honestly and with integrity.
Part IVA of the Income Tax Assessment Act 1936 (Cth) is the general anti‑avoidance rule for income tax. It protects the integrity of our income tax system by ensuring that arrangements that have been contrived to obtain tax benefits will fail.
Generally speaking, Part IVA will only apply to an arrangement if the answer is ‘yes’ to both of the following questions:
- Did you obtain a tax benefit from a scheme – a benefit that would not have been available if the scheme had not been entered into?
- Would it be objectively concluded that you or any other person entered into or carried out the scheme, or any part of it, for the sole or dominant purpose of obtaining the tax benefit?
The definition of a scheme is very broad; therefore, it is very difficult to argue that there was no arrangement. It is usually more important to work out if a ‘tax benefit’ was obtained. The main kinds of tax benefit are an amount not being included as assessable income, or a deduction, capital loss or foreign tax credit being allowed.
Recently, the government has amended the general anti-avoidance provision Part IVA of the Income Tax Assessment Act. Part IVA is intended to counter schemes that comply with the technical requirements of tax law but have a dominant purpose of avoiding tax. If specific conditions are met, the ATO may make a determination to cancel tax benefits obtained in connection with a scheme. The amendments apply retrospectively to schemes entered into or carried out on or after 16 November 2012.
If you are a taxpayer and feel that you need a confidential second opinion on whether some of your transactions could come under the expanded definition of Part IVA , please give our tax lawyers and tax accountants at The Quinn Group a call. We can be reached on 02 9223 9166 or submit an enquiry here.