Tax Planning – what can you do? What can’t you do?
You do want to get it right
When it comes to tax, Dwyer Lawyers, as Chartered Tax Advisers, may be able to help you. It is always best to get tax advice before you start doing things.
Once upon a time, tax planning was relatively simple. There were no capital gains taxes, most income, except wages or salaries, could be split freely with spouses and children. Employer superannuation contributions or golden handshakes were relatively generous while lump sum retirement benefits were 95% tax-free. If you were lucky enough to have overseas earnings taxed lightly overseas, it was free of further tax in Australia.
Most importantly of all, Courts adhered to the time-honoured doctrine that taxation legislation, like all penal legislation, was to be strictly interpreted so that the liberties and rights of the people were not reduced further than the people’s chosen representatives had expressly stated. In other words, if the taxpayer found a loophole it was not the job of the Courts to fix it up by rewriting the legislation.
But, lest anyone get too nostalgic too quickly, it should also be remembered that the top tax rate exceeded 60%, company income was double taxed and section 260 of the Income Tax Assessment Act 1936 worked pretty much as Part IVA does today. That is, Parliament had told the Courts that if anything was done to avoid tax then the Courts were to allow the Commissioner for Taxation to disregard it. (Whether this is consistent with any concept of the rule of law or constitutional separation of powers are important philosophical questions which we must leave for higher legal authorities to answer.)
In some ways, as far as tax planning goes, tax law is back where it was in the 1950s – the more things change, the more they remain the same.
Tax fraud, tax evasion, tax avoidance, tax mitigation, tax minimization, tax planning? What’s the difference?
Dennis Healey, the former UK Chancellor of the Exchequer is said to have once remarked that the difference between (legal) tax avoidance and (illegal) tax evasion was the thickness of a prison wall. Some people have equally cynically remarked that tax avoidance is the same as tax evasion – except the poor practise tax evasion because they can’t afford lawyers. Others have said that there are only two classes of taxpayers – and they are not the “rich” and the “poor” – they are the well-advised and the ill-advised.
Be all that as it may (and obviously, as lawyers, we wish to ensure our clients are indeed well advised), the broad position on permissible tax planning versus impermissible tax evasion may be summarized broadly as follows.
Tax evasion
Tax evasion or tax fraud is, was, and always will be, by definition, illegal and may involve criminal penalties as well as mere civil penalties by way of fines and penalty tax. Basically, it requires lying somewhere or somehow to evade paying tax.
In some countries, a distinction is made between active tax fraud (e.g. forging bogus GST invoices or PAYE statements to get fraudulent tax refunds) versus passive tax evasion (such as failing to file tax returns to avoid getting a tax assessment). In Australia and the UK, there is no such legal distinction though, obviously, the penalties for nakedly and blatantly trying to steal money from the government are likely to be more severe than for merely trying to avoid contributing. Indeed, up to the 1970s in Australia passive tax evasion was usually dealt with as a civil matter through additional tax penalties rather than criminal prosecution, it being recognized that the taxpayer in such cases did not have the usual legal protections of a criminal accused, being obliged to supply the evidence which would establish his defaults. That era has now passed. Anyone likely to be accused of tax evasion must therefore seek expert advice before deciding how he should deal with any tax audit or inquiries. He should not assume it is only a matter of “How much money will I have to pay?”
Tax avoidance
Tax avoidance used to mean tax minimization by any legal means, such as exploiting loopholes, as opposed to (illegal) tax evasion.
Indeed, the late Professor Wheatcroft, an expert on UK capital gains tax, once remarked that “A tax system breathes through its loopholes.” What he meant was that many desirable transactions could only be sensibly undertaken if tax could be avoided. (Perhaps one of the most amusing examples in Australia of the truth of this dictum was when NSW officials got on planes to go to Canberra and sign documents in the ACT outside NSW in order to avoid their own State stamp duty on sales of government-owned assets).
Be all that as it may, that former simple distinction between legal/illegal has been clouded by the fact that a specific or general anti-avoidance rule such as Part IVA may mean that an otherwise lawful method of reducing taxes may be declared unlawful if it is done for the sole or predominant purpose of gaining a tax benefit.
Accordingly, many people today, especially journalists and politicians, use the phrase “tax avoidance” almost synonymously (but incorrectly) with “tax evasion” which rather misses the original distinction.
By contrast, in reading older books on the subject, it is important to remember that writers used to mean “tax avoidance” for legal activities and “tax evasion” for illegal activities.
Tax mitigation
In order to reconstruct the language, for a time the House of Lords coined and used the phrase “tax mitigation” to denote lawful (e.g. non artificial) tax avoidance as opposed to attempted (“artificial”) tax avoidance which was made unlawful and struck down by some anti-avoidance doctrine of the Courts (or, in Australia, by a general anti-avoidance rule). Sometimes, the distinction is sought to be made by seeing tax mitigation as “acceptable tax planning” motivated by personal, business or family reasons as opposed to “blatant, artificial or contrived” or “off the peg” tax avoidance.
Often, the phrase “tax minimization” has been used in much the same sense as tax mitigation.
Tax planning
This brings us back to what one means by “tax planning”. We take it to mean nothing more than integrating tax considerations into business or family or personal decision-making – before undertaking any actions. This is against the assumption that people usually wish to pay less, not more, tax. (After all, you don’t need to ask a lawyer how to pay more to the Government. The Treasury is always willing to receive private gifts, though it may come as surprise to you that you will not get a deduction unless the gift is for the purpose of defence).
An integrated approach looking at tax planning in the context of personal, family or business objectives is necessary because the very nature of a general anti-avoidance provision such as Part IVA may mean that action X (e.g. sell shares at a loss) done by person A on 30 June to cut his tax bill and for no other reason may be struck down by Part IVA whereas the same action undertaken by person B on 28 January for a different and documented reason (e.g. pay some bills) would be regarded as unobjectionable.
The Courts assume, as Lord Upjohn once remarked, that no commercial man in his senses will proceed with any transaction except upon the basis of paying as little tax as possible. The Commissioner of Taxation and lawyers assume likewise.
This raises a paradox. How does one distinguish between (acceptable) tax planning and (unacceptable) tax avoidance if we assume everyone is trying to minimize tax?
It all turns on objectively-ascertained purpose. It may seems strange to say that the tax you pay should depend upon what other people may think of what you have done – but there it is.
Thus there is a practical need to put tax planning into the context of your real-world personal, family and business planning. As the Commissioner of Taxation has stated “it is not the case that Part IVA requires the maximum tax to be paid. The mere obtaining of a tax benefit will not attract Part IVA if, objectively, the ruling purpose of the scheme participants was a non-tax one.” (Michael D’Ascenzo, Part IVA and the common sense of a reasonable person, Taxation in Australia, August 2002, p 76)
Conclusion
The practical result is that tax planning cannot be undertaken in isolation. To give sensible legal advice on tax matters, a good lawyer and tax adviser has to know what exactly it is that you in your particular circumstances are trying to achieve and why. Only when we understand precisely what your concerns are, can we start to give advice as to this or that way of achieving your underlying objectives. To use a homely phrase, tax planning should be the tail which does not wag the dog – it is just a part of wealth and business planning.