I always laugh when someone says they wouldn’t mind paying more tax. What’s amazing about many people who proudly puff their chest and blurt this claim out, is that there is nothing stopping them sending money to the Tax Office and then not seeking a refund. Funnily enough, not many of them actually get around to do this.
The fact is most people don’t like paying tax. I think most people follow Kerry Packer’s famous statement before a Senate committee 25 years ago – “I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”
Most don’t want to enter into some dodgy arrangements to avoid every last dime of tax because we all know the ATO can use some remarkably powerful measures to take their revenge.
Budget super changes will encourage tax planning
However, the effective tax increases to super – for example, limited non-concessional contributions to $500,000 and only allowing pensions to have a maximum $1.6 million account balance – will encourage some people to create more tax effective structures.
This always happens whenever taxes increase.
Tax planning is not tax avoidance or evasion
There is a big difference between planning and avoiding tax.
With planning to limit tax, you’re seeking to use the tax laws to reduce the amount of tax you pay. With avoiding or evading tax, your objective is to put in place a structure or series of transactions that mean you pay less tax.
Sometimes it can be very difficult to know the difference – in fact, it might seem like splitting hairs. It’s probably no surprise to know that over the last 80 years there have been many tax law court cases about the difference between tax planning and avoidance.
The ATO lends a helping hand
Sometimes to navigate your way around the difference between tax planning, avoidance and evasion, a taxpayer would need to spend a considerable amount of money seeking good advice from lawyers and others experienced in a particular part of the law.
Fortunately, the ATO now has a service called “Super Scheme Smart”.
The ATO says that often SMSF investors are targeted with arrangements that:
- “are artificially contrived with complex structures usually connecting with an existing or newly created SMSF.
- “involve a significant amount of paper shuffling.
- “are designed to give the taxpayer minimal or zero tax, or even a tax refund.
- “aim to give a present day tax benefit by adopting the arrangement [that is, get tax breaks now as opposed to waiting for them to be paid].
- “invariably sound ‘too good to be true’, and, as such, they generally are”.
The objective – make superannuation even more concessionally taxed.
Who is at risk?
Well, basically anyone who is approaching retirement – that is, someone getting near to retirement and wanting to maximise their savings before stopping work.
Often the ATO says the people who fall into this category are “self-funded retirees, small business owners, company directors and individuals involved in property investment”.
In other words, the people potentially most at risk are those reasonably experienced at investing and managing their financial affairs.
Often you’re asked to keep the arrangement “secret” and you might be discouraged from seeking independent advice about the structure. And often times there is no disclosure documentation (such as a Product Disclosure Document).
Some examples
The ATO say that some tax avoidance structures look to achieve some of the following:
- deferring income to a later tax period so the tax is paid in a later period too.
- not declaring income or hiding income (for example, in an offshore location such as a tax haven).
- changing the nature of the income so less tax is paid, for example, changing capital expenses into revenue expenses.
- changing private expenses into business expenses so they can be claimed against income.
- creating an entitlement to a tax offset or credit that wouldn’t otherwise have been available.
- moving income to a trust or partnership to split it among people in a lower tax bracket so less tax is paid.
- inflating or artificially creating deductions.
- moving taxable income to an entity that is tax exempt or has a lower tax rate, such as a charity, company or super fund.
- setting up a business for the sole purpose of obtaining tax benefits – that is, there is no business purpose to the arrangement.
Stiff Penalties
If you get into one of these schemes and the ATO catches you, then the penalties can be very severe – it can impose tax penalties (under powers it has under the tax administration laws) and it can also impose penalties under the super laws, including declaring your fund to be non-complying, which means the assets of your fund (except non-concessional contributions) would be taxed at 47%.
How to avoid getting into trouble
The ATO suggest that the best approach is to avoid getting into one of these schemes.
But if you’re already involved, then the best strategy is to either speak to a professional such as a tax agent or approach the ATO directly. The point is that if you voluntarily give yourself up, then the ATO may be more lenient with the penalties that they impose on your affairs.
You can find out more at this ATO website link [1].
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.