ACC80012 Tax Evasion, Avoidance And Planning - Assignment Solution

Introduction

The concepts of tax evasion, tax avoidance and tax planning are often confused and used interchangeably by the taxpayers and tax collectors and regulators. However, there are differences that set these different concepts apart. This report realizes the crucial differences between these terms and seeks to clarify that whilst tax evasion and avoid paying tax thru illegal means is what is recognized by the world at large, there are also legally possible ways to minimize the payment of taxes without committing and offence. This report also discusses some of the most important judicial decisions pertaining to the concepts of tax evasion and avoidance and how it applies in the modern digital and information age today. In the last part the report tries to summarize the actions taken by Australian Taxation Office (ATO) to curb tax evasion and tax avoidance in Australia and expresses views ass to whether the steps taken have proven to be instrumental in benefiting the revenue and public finance (Hite 1989). The report ends with some practical suggestions as to how to improve voluntary compliance with state income tax laws and regulation. The data used, facts stated and case laws cited are all part of either the state legislation or tax cases’ directory available in the legal archives (Roberts 1994).

2.0 Tax evasion, tax avoidance and tax planning – setting them apart

Tax evasion is the most aggressive and illegal way of paying less tax than you legally owe, whereas tax avoidance is although illegal but is a less aggressive way to avoid payment of taxes. Tax planning is different both in terms of substance as well as intention of the taxpayer, but still results in lesser payment of tax. Here is how the three concepts are distinguishable:

2.1 Tax evasion

When committing tax evasion, the taxpayer commits an illegal action with intent to deceive the tax authorities and regulators. It typically involves making under-declaration of income or fraudulent claim of expenditure to reduce the income and thereby pay lesser amount of tax then you are actually liable to pay under the law (Barkoczy 2019).

Examples of tax evasion include the following:

• Under-invoicing – this involves getting into an arrangement with the customers whereby you bill invoices showing lower value than the actual sale made. This results in fraudulent reduction in revenue, and is often followed complemented with maintenance of multiple books of accounts.
• Non-declaration of assets or sources of income to the tax authorities during the assessment stage
• Richard Hatch was a contestant in the reality TV show ‘survivor’ where he won $1 million. However, he failed to disclose the income and pay tax thereon with his return of income despite being informed by the show runners CBS that proceeds are taxable. He was later found guilty of tax evasion and served a sentence in fail as well as fine (Belluck 2006).
• A former offensive lineman for US football club San Diego Chargers – Ron Mix likewise faced a three-year prison sentence and fines for listing referral fee payments as charitable donations amounting $155,000 (USAtoday 2016).

2.2 Tax avoidance

Tax avoidance involves carefully contrived and intelligently designed arrangements that appear to be legal in all senses but the intention is to avoid the payment of taxes through exploitation of unintended defects and loopholes in the framing of tax legislation. The essence of tax avoidance as explained in the famous UK decision IRC v Willoughby (1997) includes that the taxpayer seeks to take benefit of short payment of tax afforded under the law without having to undergo the economic consequences that the Parliament intended the taxpayer qualifying for such tax reduction / exemption to be suffered. In short, through these carefully contrived schemes taxpayer seeks to reduce his tax burden through deception and sham (Barkoczy 2019).

Examples of tax avoidance includes:

• Framing an agreement in a way that makes it look like a transaction that enjoys tax reduction or exemption while in actual the transaction is for something that attracts tax. For instance, an agreement for rent of property (attracting high rates of tax) framed as a franchise agreement (having low taxes)
• Making payments or incurring expenditure on behalf of close family members or a third person in order to avail or pass out tax benefits
• Instead of paying salary to the directors, companies offer them loans at low interests and later write them off in the books. Essentially this is a payment of salary disguised as a loan.
• Avoidance of taxes through creation of separate vehicles or entities such as Contractor Loan Schemes or Employee Benefits Funds / Trusts.