What’s The Difference Between Tax Avoidance And Tax Evasion?

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Tax Evasion, Offshore AccountThe title of this article is also the question in a common joke, with the punch line being – prison! In reality, that punch line is no joke, as tax evasion is indeed a criminal offence that could see you doing some jail time. Tax avoidance on the other hand, commonly involves financial penalties such as fines or the forfeiture of tax benefits derived from the avoidance activities.

So, what is the technical difference between the two? Tax avoidance involves a scheme that works within the letter of the law to minimise your tax, but not within the spirit of the law. In essence, if the main reason you have undertaken an activity is to reduce the amount of tax you will owe, that would fall under the general anti-avoidance legislation contained in Part IVA of the Income Tax Assessment Act of 1936.

For the anti-avoidance provisions to apply, there must be a scheme, which results in a tax benefit (which must be the main reason for the scheme) and it needs to have occurred after May 27, 1981.

Tax evasion, on the other hand, involves making false claims in order to reduce your tax obligation, by understating your income or overstating your deductions. Depending on the seriousness and size of the offence, you could face penalties ranging from fines, a good behaviour bon or community service, right through to a jail term.

In America in the 1920s, mobster Al Capone was found guilty of tax evasion, and despite the fact that the US government was unable to prosecute him on his more obvious criminal activities relating to prohibition, the tax evasion conviction resulted in an eleven-year sentence. He served seven and a half years and never regained his criminal empire.

To ensure that you don’t face prosecution for tax evasion, you simply need to ensure that your income and deductions are stated honestly on your tax return. If you have any doubts, you can contact the ATO directly to receive their advice.

Tax avoidance can be a little trickier. If a qualified tax advisor is preparing your tax return, you should see a consistency from one advisor to the next regarding what you will owe. If a particular advisor is promoting that they can dramatically reduce your bill, which should be cause for some concern. Once again, you can contact the ATO for their advice before proceeding.

By Jennifer Lowe

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