RSM Australia

What is tax planning?

Tax Insights

Often accountants can be heard talking about and encouraging taxation planning to our clients. It is an oft used catchcry in the business world that ‘failing to plan is planning to fail’, this may well be an accurate statement, but how much taxation planning and strategy is acceptable before you raise the ire of the ATO? 

There are effectively three main levels of taxation strategy which can be employed by taxpayers to minimise their tax liability. Tax evasion, tax avoidance and tax planning.

Tax evasion involves the non-payment of tax by either failing to declare income or by claiming deductions to which the taxpayer knows they have no legitimate entitlement. Tax evasion can incur severe penalties including fines and jail terms.

Tax avoidance involves reducing the tax payable by complying with at least the letter of the law, but through an artificial or contrived scheme. Tax avoidance can also incur severe penalties such as fines and jail terms.

Tax planning involves operating within the letter and the spirit of the law to reduce the tax liability, but without entering into an artificial scheme and/or arrangement. Tax planning incurs no penalties and this is obviously the level at which all taxpayers should aim to operate. 

Tax planning must be based on sound commercial principles regardless of the tax advantages gained. If the transaction does not make sense commercially it is easy for the ATO to argue that the dominant purpose of the transaction was in fact to gain a tax benefit. This will land you back in evasion territory and put you at risk of penalty.

To avoid these issues and to protect your self from potential prosecution always apply the blowtorch to your decision making process and review and document the facts regarding the transaction. Grill your accountant and get proper written advice that deals specifically with the facts of the situation. Seek a second opinion if necessary. If you are still not satisfied you can apply to the ATO for a private ruling which will provide a binding interpretation of the law as it relates to the transaction. 

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