ATO Warning: Watch Out for Tax Avoidance Schemes

To many individuals, the difference between tax planning and tax avoidance is not immediately obvious, while the ATO considers the former to be a legal way of arranging your affairs to minimise the tax you pay, the latter could land you in legal hot water. So, how can your clients tell the difference? The ATO has outlined some common features of tax avoidance schemes in order to warn individuals to steer clear of them. While it is not always easy to identify these schemes, the old adage of “if it seems too good to be true, it probably is” usually applies.

The ATO warns individuals to steer clear of tax avoidance schemes involving deliberate exploitation of the tax and super systems which may put them at risk of paying back tax, with interest and penalties. According to the ATO, most people get suckered into these schemes by promoters making promises of tax benefits that aren’t legally available.

These tax avoidance schemes range from mass-marketed arrangements advertised to the public, to individualised arrangements offered directly to experienced investors. Other schemes exploit the social/environmental conscience of people or their generosity. As different as these schemes are, the common thread often involves promises of reducing taxable income, increasing deductions, increasing rebates or entire avoidance of tax and other obligations.

Examples of Tax Avoidance Schemes

The ATO notes that tax avoidance schemes may include complex transactions or distort the way funds are used in order to avoid tax or other obligations. Schemes may also incorrectly classify revenue as capital, exploit concessional tax rates, or inappropriately move funds through several entities including trusts to avoid or minimise tax that would otherwise be payable.

Currently, the ATO has its eyes on retirement planning schemes, private company profit extraction and certain financial products. In relation to retirement planning, it has outlined areas of concern including non-concessional cap manipulation, life interests over commercial property, dividend stripping, some types of limited recourse borrowing arrangements, and personal services income.

For private companies, the ATO is concerned with privately owned and wealthy groups with tax or economic performance not comparable to similar business and those with low transparency tax affairs, or unusual/large transactions with could be an indicator for shifting of wealth.

While the majority of financial products offered to retail investors do not raise concerns with the ATO, it has flagged a small number of products that promise to provide investors with tax benefits where those benefits may not be available to some or all investors who invest in the product. Additionally, there may be issues concerning whether interest and borrowing costs can be claimed as a tax deduction, transactions involving deferred purchase agreements, and various CGT issues.

Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.