Compliance
Tax avoidance
Tax avoidance is arranging your affairs mainly to obtain a tax benefit in a way the law is not intended to allow. It differs from legitimate tax planning and from illegal evasion.
Tax avoidance sits between legitimate tax planning and illegal tax evasion. Choosing a business structure, making use of deductions you are entitled to, and timing expenses within the rules are all acceptable. Avoidance is different. It involves entering into a scheme, usually with a dominant purpose of obtaining a tax benefit, in a way that goes against the intended purpose of the law, even if each step appears legal on its own.
Australia has general anti-avoidance rules in both the income tax and GST laws. Under these rules, the ATO can cancel a tax benefit that was obtained through a scheme if, looking at all the circumstances, a person entered into it with the dominant purpose of getting that benefit. In effect, the ATO can look at the substance and not only at the legal form of an arrangement. The GST law has its own provisions to deal with GST avoidance.
Examples that might attract attention include artificially splitting a business into several entities to stay under the GST registration threshold, creating transactions with no commercial purpose to generate GST credits, or arrangements that convert taxable supplies to GST-free or input-taxed treatment without real change in activity. Each case depends on facts, but the key theme is whether the arrangement has a genuine commercial purpose beyond tax savings.
Consequences can be serious. The ATO can reverse the benefit, which means the taxpayer owes the tax that was avoided, plus interest. Penalties for schemes can be higher than ordinary shortfall penalties, since the conduct is seen as more serious. In addition, advisers who promote avoidance schemes can face action from the Tax Practitioners Board and other regulators.
Taxpayers can reduce risk by seeking advice early, documenting the commercial reasons for their arrangements and, where significant uncertainty exists, applying for a private ruling. If a scheme sounds too good to be true, such as guaranteed refunds or large deductions for little outlay, it is wise to be cautious. Relying on a promoter who markets an arrangement does not stop the ATO from pursuing the taxpayer.
It helps to remember that lawful tax minimisation is not avoidance. Claiming all valid deductions, using concessions designed for small business and structuring a business for genuine commercial reasons are all legitimate. The line is crossed when the main aim is the tax outcome and the arrangement lacks commercial substance.
This page is general information only. Confirm your position with the ATO or a registered tax professional.
Worked example
A restaurant owner whose taxable sales are $200,000 a year sets up three empty companies and tries to split the turnover into amounts of about $66,000 each, hoping to avoid GST registration. The ATO may treat the arrangement as a scheme to avoid the registration threshold and treat the entities as one enterprise, requiring GST of about $18,000 on the $200,000 of sales, plus interest and penalties.
Practical tips
- Make sure every arrangement has a genuine commercial purpose, not just a tax benefit.
- Be wary of schemes promising guaranteed refunds or deductions, and get independent advice.
- Consider a private ruling for large or unusual arrangements.