Is it bad to want to save tax?

We hear in the news and through politicians of big companies and others avoiding their tax responsibilities. These businesses are always cast in a very poor light with the implied accusation that what they are doing is bordering on criminal activity. But is it wrong to want to save tax? If you could save some tax, would you not want to do this?

This issue centres on the debate concerning what is tax planning and tax evasion. Tax planning is considered (in most circles) to be legitimate whereas tax evasion is considered to be approaching a criminal act. So what’s the difference? Both activities have the purpose of saving tax. What makes one type of tax saving OK, while the other type is not?

Tax planning is about structuring your affairs within the bounds of what the law permits and what is considered to be responsible business behaviour. For example, a tradesperson is operating their business in their own name and being taxed on all of the income. That person pays a lot of tax because of this structure. It is suggested to him or her that they could operate through a company and have the profits, initially, taxed at a rate of 25%. Let’s say this saves the immediate payment of tax on the profits of the business.

This is what is referred to as tax planning. A structure is chosen than causes less tax to be paid. All of this is within the bounds of the law, and it is common business practice for a business to be operated through a company.

Although there is no clear definition of what constitutes tax evasion, it can be thought of as engaging in activities that try to avoid paying tax on income where the intention of the law is to tax that income. This can range from non-disclosure of income in a tax return to being paid in cash such that the cash is never deposited in a bank account where the existence of the cash can be found by the Tax Office.

However, it is the case that the line between legitimate tax planning and what is considered to be tax evasion can be “fuzzy”. What is considered to be permissible under the tax law and what is considered to be egregious behaviour is something that the courts have had to grapple with.

The Australian tax law contains a general antiavoidance rule. It can apply when there is a scheme to obtain a “tax benefit” and the scheme has been entered into with the sole or dominant purpose of obtaining the tax benefit. This provision requires the decision of the Tax Office to apply it and it is only applied after deep deliberations within the Tax Office that often take years. Accordingly, there have been few applications of this provision within the last 10 years.

Much of what is considered to be bad tax behaviour depends on what the Australian Taxation Office has stated it considers to be such behaviour. How do you know what this is? Unless you are an avid reader of the ATO website and other ATO pronouncements, you won’t know. This is where your accountant can help. Accountants/tax agents are required to undertake continual tax training in order to keep their tax agent registration. Part of this is keeping up to date with what the ATO considers to be tax behaviours of concern. Your accountant is in the best position to let you know what is considered OK tax behaviour and what is not OK.

Contact support@minimalaccountant.com.au today for any assistance you may need.

This is general advice only and does not consider your specific financial circumstances. You should seek tax advice from a qualified accountant before making any decision based on this document.