Is it bad to want to save tax?
We hear in the news and from politicians about big companies and individuals avoiding their tax responsibilities. These businesses are often portrayed in a negative light, with the implied suggestion that their actions are bordering on criminal activity.
But is it wrong to want to save tax? If you could save some tax, wouldn’t you want to do so?
The line between tax planning and tax evasion
This issue centres on the debate between tax planning and tax evasion. Tax planning is generally considered legitimate, while tax evasion is widely viewed as crossing an ethical and in some cases, legal line. Both approaches aim to reduce tax, but what separates one as acceptable and the other as problematic?
What does tax planning look like?
Tax planning is about structuring your affairs within the framework of what the law allows and what is seen as responsible business behaviour. For instance, a tradesperson operating as a sole trader might be paying more tax than necessary. They’re advised to establish a company structure, where profits are initially taxed at 25%. This move saves on tax and is completely legal.
This is tax planning in action: a lawful restructuring that reduces tax liabilities. It’s a common and accepted practice in the business world.
When tax planning becomes something else
While there’s no rigid definition of tax evasion, it generally refers to hiding income or intentionally avoiding tax where the law expects tax to be paid. This could include underreporting income or being paid in cash and deliberately not declaring it.
The boundary between legitimate planning of tax and evasion can be blurry. The courts have often been called upon to assess whether a taxpayer has acted within the spirit of the law.
The general anti-avoidance rule and tax planning limits
Australian tax law includes a general anti-avoidance rule. It applies when someone enters into a scheme with the sole or dominant purpose of gaining a tax benefit. The ATO may choose to invoke this rule after a detailed internal review, but it’s rarely used, with only a handful of applications in the past decade.
This is why sound tax planning matters. Structuring your affairs without triggering the general anti-avoidance provisions requires a clear understanding of both legal and practical considerations.
How to stay on the right side of tax planning
A lot of what is considered inappropriate tax behaviour comes down to what the ATO currently sees as problematic. Unless you’re regularly reading ATO guidance and rulings, it’s easy to fall out of step.
This is where a qualified accountant becomes essential. Accountants and tax agents must stay up to date with ATO expectations and guidance through continuous professional education. A trusted advisor can help you identify legitimate tax planning strategies and steer clear of potential pitfalls.
Need support with tax planning in your business?
MacMillan Cowan & Co’s experienced accounting team can help you explore effective legal strategies to minimise tax while staying compliant. Get in touch today for practical advice tailored to your circumstances.
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