Tax planning arrangements that go beyond what the law intended are tax avoidance schemes.
These schemes involve deliberate approaches to exploit the tax system. The way an arrangement is structured, the financing, documentation and advice offered can all be indicators of a suspect scheme.
Because some tax schemes are very cleverly dressed up as legitimate arrangements, it’s important to know what to look for. Carefully check the:-
Advice and documentation—Be wary of promoters that:-
- offer zero-risk guarantees for their product
- refer you to a particular adviser or expert (they may claim the adviser has specific knowledge about the arrangement and the promised tax benefits)
- ask you to maintain secrecy to protect the arrangement from rival firms
- discourage you from obtaining independent advice
- do not have a product disclosure statement (PDS) or prospectus for the product.
Finance—Many tax schemes are promoted with mechanisms to help you finance your involvement. The following are red flags:-
- ‘Round robin’ financing, where the funds are passed through various entities.
- ‘Non-recourse’ loans that you don’t have to repay if the investment goes bad.
- Complex financing arrangements.
- Investments that are primarily funded through tax deductions.
Structure—The way an arrangement is structured can indicate it might be a scheme. Be careful of any arrangement that involves:-
- 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 off shore 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.
Don’t take the promoter’s guarantee that there is no risk in participating in the arrangement. If it has any of the above features seek independent advice from your Pinnacle Advisor before doing anything.
- the provider of the advice is not a registered tax (financial) adviser
- if the receiver of the advice intends to rely on the advice to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, the receiver should request advice from a registered tax agent or a registered tax (financial) adviser.