There are countless misused tax terms that get thrown around by individuals and businesses alike.
Three of these are:
- Tax evasion
- Tax avoidance
- Tax minimisation
Despite the similar-sounding names, all three refer to completely different things – let a Melbourne tax accountant tell you the difference between them!
Let’s start with tax evasion
For those not in the know, tax evasion refers to businesses or individuals who maliciously misrepresent their tax obligations.
Put bluntly, tax evasion is a form of fraud. It is completely illegal, and the ATO will come down on you hard – we’re talking about large fines, and potentially jail time.
The key differentiating factor is that tax evasion is malicious. It’s when you lie on your tax return to reduce how much tax you’re required to pay.
Common examples of tax evasion include:
- Underreporting or falsifying income
- Claiming deductions for fake business expenses
- Reporting fake dependents on your personal tax return
Tax evasion does much more than put you at risk of a considerable fine. While it may benefit you in the short-term, it hurts everybody in the grand scheme of things.
That means less money going towards funding infrastructure and crucial public utilities.
“What happens if I make a mistake on my tax return?”
Luckily, the ATO is pretty good at distinguishing between genuine mistakes and malicious intent.
In most first-time offences, you might even have your fine waived in its entirety and be provided advice on how to avoid the same mistake going forward.
Click here to learn more about penalty relief, and whether you’ll receive one.
Tax minimisation schemes are A-okay
While it may sound similar, there’s one important distinction between tax evasion and tax minimisation.
Namely, the fact that tax minimisation is 100% legal. In fact, odds are you’ve engaged in tax minimisation yourself at one point!
Like the name suggests, tax minimisation is all about minimising your tax burden. For businesses, that means:
- Writing off bad debts before EOFY – you may receive a GST refund
- Applying for tax deductions like the $20,000 immediate asset write-off
- Prepaying expenses – most business prepayments are tax-deductible
And for individuals looking to reduce their personal tax obligation, that can include:
- Making concessional superannuation payments
- Claiming tax deductible donations if you give to charity (click here to see whether donations your chosen charity are deductible)
- Claiming work-related expenses (remember to submit documentation!)
Each of these is completely above board. In fact, most of them were deliberately put in place by the government for individuals and businesses like yourself – so there’s nothing wrong with making use of them.
But what about tax avoidance?
All tax minimisation schemes are completely legal – however, that doesn’t mean that all are ethical.
Some businesses and individuals take the idea of tax minimisation a little bit too far. Instead of sticking with legitimate deductions and allowances, many go out of their way to add further deductions using loopholes and technicalities.
These are what many of us in the business call tax avoidance. While not breaching the word of the law, these schemes certainly aren’t in line with the spirit.
In these cases, the ATO uses the “dominant purpose” test – was the main goal for applying this tax minimisation strategy to dodge tax?
If so, you can expect a visit from the taxman!
Examples of tax avoidance
The line between tax minimisation and tax evasion can be blurred, especially if you resort to loopholes or legal grey areas to bring down your tax burden:
- Signing your staff on as contractors rather than employees
- Using a self-managed super fund or trust to purchase assets
- Paying for things in cash
Each of these serve legitimate purposes in both business and personal finance. However, many take them too far and use them to further reduce their tax burden.
Talk to a Melbourne tax accountant
Of course, for many individuals and businesses, filing your tax return isn’t as simple as pressing a button. You’ll have to wrangle with payments, expenses and deductions, among other things.
This isn’t something you’ll want to get wrong.
If you want to avoid accidentally committing tax evasion and legitimately minimise your tax burden, get in touch with Bruce Edmunds & Associates.
We’ve been providing personal and business tax services since 1966.
During that time, our values haven’t changed – we’re committed to taking the work out of tax accounting and minimising your obligations as much as possible.