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To understand the provision that generally targets tax avoidance in income tax law, it is important to examine and distinguish between the concepts of tax evasion, tax avoidance, and tax planning. The line between legitimate tax planning and tax avoidance is hard to draw. Sometimes items listed under tax planning can fall into tax avoidance, particularly if done in an overly aggressive way and with little or no commercial justification. On the other hand, the line between tax evasion and tax avoidance is clearer, although it too can be blurred in some instances.
Tax evasion
Tax evasion is the non-payment of the tax which would properly be chargeable to a taxpayer if the taxpayer made a full and true disclosure of assessable income and allowable deductions. It usually involves the failure to declare income and/or the claiming of deductions or tax offsets to which the taxpayer knows that he or she has no legitimate entitlement. For example, the owner of a “cash” business may simply not declare all receipts from sales; an employee may claim a deduction for protective clothing when no expense was in fact incurred; or a person with no dependants may claim a dependant’s rebate.
Tax avoidance
Tax avoidance, as that term has come to be understood, seeks a reduction in liability to tax while complying at least with the letter of the law. While in one sense it may be said that “tax avoidance” is simply the outcome of successful tax planning, in the context of this commentary, the term “tax avoidance” means the entry into highly “artificial or contrived” schemes by a taxpayer seeking to avoid tax. It involves taxpayers entering into transactions which, while having legal consequences, have little or no real impact on their financial position or at least on the financial position of themselves and their “associates” taken as a group.
Such contrived schemes may take a number of forms. They may seek to transform income which would otherwise be taxable into income that escapes liability to tax (as in FC of T v Spotless Services Ltd (1995) 62 FCR 244; 95 ATC 4775 (Full Federal Court); 96 ATC 5201 (High Court) or which is taxed at more concessional rates (such as under the CGT regime). Alternatively, avoidance schemes may seek to generate deductions to be offset against income derived by a taxpayer. By creating “artificial” deductions, the taxpayer endeavours to expunge a contingent liability to tax which would otherwise be payable on his or her income. Interest prepayment schemes afford a good example of the type of tax avoidance schemes which taxpayers could readily purchase as a “package” from a promoter in the mid-1970s.


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URL : http://www.accountsnextgen.com.au/

Blog ID : 255101

Category : Finance

Date Added : 20-5-2020

Tags : planning | evasion