Tax Avoidance vs Tax Evasion in Australia: Key Differences & Consequences

Tax avoidance (sometimes referred to as tax minimisation) and tax evasion are two very different things in the world of tax and these terms are often confused, particularly in Australia.

Tax avoidance is a scheme or arrangement where a taxpayer enters a transaction that complies with the letter of the law but has the effect of obtaining a tax benefit.

Tax evasion is the illegal non-payment of tax that would be properly payable if full and true disclosure of assessable income and allowable deductions had been made.

Traditionally, tax avoidance was distinguished from tax evasion in Australia because avoidance does not involve active or passive fault by the taxpayer.

They refer to significantly different actions in the eyes of the Australian Taxation Office (ATO).

What is Tax Avoidance in Australia?

Tax avoidance refers to the legal methods individuals and businesses use to minimise tax liability whilst adhering to the letter of the law.

Adherence to the letter of the law does not always mean that the action taken is within the spirit of the law.

Tax avoidance is often characterised by strategies that take advantage of tax incentives, deductions, and creative (but nevertheless lawful) strategies.

Great care must be taken when entering into a scheme that results in a tax benefit to not fall foul of the general anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936.

Common Tax Avoidance Actions Taken in Australia

1. Utilising Tax Deductions

One common tax minimisation strategy involves making use of lawful tax deductions.

In short, deductions are allowed for amounts incurred in gaining or producing assessable income unless a specific provision within the various Tax Acts prevents the deduction.

Common deductions claimed by individual taxpayers are the costs of:

• work-related expenses
• self-education costs
• charitable donations.

Businesses often claim deductions for:

• operating expenses
• employee salaries
• superannuation contributions.

2. Maximising Superannuation Contributions

Australians can reduce their taxable income by making additional contributions to their superannuation.

Concessional limits apply before favourable tax treatment becomes unavailable.

3. Salary Sacrifice

Salary sacrifice involves sacrificing a portion of your salary in exchange for non-cash benefits provided by an employer, such as additional superannuation contributions or other benefits, which may be taxed at a lower rate.

4. Capital Gains Tax (CGT) Planning

Investors can strategically plan the timing of their capital asset sales to minimise capital gains tax liability.

Small Business CGT Concessions may apply upon the sale of a business.

5. Investing, Structuring & Income Splitting

Investing in tax-effective options, such as assets that provide franked dividends, can result in franking credits that offset overall tax liability.

Additionally, establishing a family trust can allow for the streaming of income distributions among family members, potentially resulting in lower overall tax rates.

Finally, business owners can split income with family members to take advantage of lower marginal tax rates – this is common with husband-and-wife partnerships.

What is Tax Evasion in Australia?

Tax evasion can have serious criminal offending consequences in Australia.

Tax evasion involves knowingly providing false or misleading information to the ATO, hiding income, or engaging in fraudulent activities to reduce or eliminate tax liability.

Tax evasion is a breach of the law and can result in severe penalties, including hefty fines and imprisonment.

Examples of Tax Evasion in Australia

1. Underreporting Income

Failing to report income from various sources, such as rental properties, offshore accounts, or cash-in-hand payments, is a common form of tax evasion.

2. Inflating Deductions

Making inflated or false deduction claims is a common method of attempting to evade payment of tax.

3. Offshore Tax Havens

Moving money to offshore bank accounts or using complex international structures to hide income and assets from the ATO can be tax evasion, or at the very least, be the catalyst for the ATO taking an interest in your tax affairs.

Consequences of Tax Avoidance & Tax Evasion

Tax Avoidance:

• Lawful
• Results in legitimate tax savings
• Minimises tax liability while complying with tax laws
• No criminal penalties.

Tax Evasion:

• A criminal offence with severe penalties
• Can lead to fines, imprisonment, or both
• Damages one’s reputation and may result in legal and financial troubles.

Contact Us

Understanding the differences between lawfully minimising tax and tax evasion in Australia is essential for individuals and businesses alike.

While tax minimisation involves lawfully minimising your tax liability using available incentives and deductions, tax evasion involves illegal activities with serious consequences.

To stay on the right side of the law and make informed tax decisions, consult with a tax professional who can help you navigate the complexities of the Australian tax system.

For more information, contact us at Bambrick Legal today. We offer a free, no-obligation 15-min consultation for all enquiries.

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Related Blog – ATO Audits: Can They Be Avoided?