With tax time around the corner and current discussions of corporate tax, we often hear a number of misused terms that describe business strategies and behaviours. These commonly include words such as ‘tax avoidance’ and ‘tax evasion’.
Rolling of the tongue, these two terms sound quite similar right? It’s hard to know the difference without really looking into it. Despite the apparent resemblance, the two are strikingly different.
The difference is between legal and illegal measures. We must be able to understand where business activity crosses the line and becomes illegal.
To put it plainly, tax evasion is a criminal act. It is illegal. Tax evasion occurs when there is a legitimate attempt to get out of paying tax. Whereas, tax avoidance, although not illegal, are ways in which the taxpayer uses strategies to minimise tax within the limits of the law. These strategies are commonly referred to as tax minimisation.
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This refers to businesses who knowingly and deceitfully misrepresent their tax obligations. It involves illegal tax minimisation. These sorts of acts are fraudulent businesses activities. For example, not reporting interest earned on loans.
How is Tax Evasion Dealt With?
The decision of what conduct constitutes tax evasion rests in the role of the courts. Along with the courts, the Australian Taxation Office (ATO) regulates business strategies and determines cases of tax evasion. Conduct only becomes tax evasion if realised by the ATO, or alternatively if challenged by the courts. If found guilty of a tax evasion, it can be expected that a hefty fine may come your way or in more serious cases, the penalty can be a sentence.
Commonly referred to as tax minimisation, tax avoidance strategies have a low chance of being red flagged in tax audits as compared to blatant misrepresentations; tax evasion.
However, it is not always clear how the two concepts are distinguished. In fact, the line between the two can almost be invisible to the ordinary eye. To overcome this, the courts use the ‘dominant purpose test’ to distinguish between the two. The test is proved by showing that the business’s sole motivation was to find a way around their tax obligations; part IVA of the Income Tax Assessment Act 1981. If an arrangement is set up with an alternate purpose it can be hard to establish tax evasion. It is these circumstance that become tax avoidance strategies.
Is compliance becoming more and more difficult?
The constant changes to the Australian Tax System have become so complicated that for the ordinary start-up business it can be hard to comprehend the legalities. Tax obligations can soon become blurred without assistance or advice from an expert. If you’re a startup or small business and are unsure, and would like to complete your tax confidently, it is safe to receive the assistance of a professional. This way yourself and your business will be protected and will have a good legal footing immersed in the small business world.
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