How Far Do We Go? Tax Minimisation vs Tax Avoidance
Beany is a member of the Chartered Accountants of Australia and New Zealand professional association and we abide by the Code of Ethics (see below) to keep its members and the public safe.
But how far do we go in advocating and advising our clients on tax minimisation? And what does tax minimisation mean as opposed to tax avoidance (or even evasion)?
Tax minimisation is where we use our best experience, judgement and training to interpret accounting and tax legislation to enable you, the taxpayer, to pay the least amount of tax legally possible.
It is completely incorrect to think that accounting and tax is a ‘black and white’ business. We know that there are more grey areas than clear cut decisions by the amount of tax cases going to court (see the famous case below). Sometimes the IRD wins, but often the taxpayer does, so it is not clear cut at all!
Penny & Hooper vs CIR
“The IRD spokesman said the Court of Appeal had indicated that absolute clarity was not possible in the area of tax avoidance.” This is a quote from the IRD on the case of Penny and Hooper vs CIR. This case was won by the taxpayer initially in the High Court – but then the decision was overturned by the Court of Appeal, showing that even the legal minds were struggling with this decision. The IRD won this one and the dentists got pinged.
This case was important because it deals with a very common scenario:
Two dentists were using a company structure to minimise their tax bill. They paid themselves a below market salary to reduce the amount of tax to pay. It raised all sorts of issues such as what is a market salary, when must it be applied and who decides how much it is and whether it is fair and reasonable.
The Court ruled in this case that you can pay below a market salary if:
- the company is operating at a loss;
- the salary paid is equal to all of the company’s pre-salary profits;
- the company needs the funds for capital expenditure; or
- the company is experiencing financial difficulties, or considers that it might do so in the future.
In other words, a market salary is not required if there are extenuating circumstances.
But we need to take care, think about the issues and have a position which is reasonable and defensible. It’s no use arguing with your accountant on a tax issue unless you are equally happy to stand in a court of law and argue it with the judge.
Tax avoidance or evasion involve more dubious schemes that are designed to help you avoid your legal tax responsibilities.
As professionals, it’s fair to say that we often “know it when we see it” to paraphrase a famous saying. We can feel when a suggested tax scheme is fair and sensible, or when it is an attempt to subvert tax law. Classic examples of the wrong side of this are:
In recent history, some accountants were advising clients to sell your family home to a trust or company and rent it back so that your interest and home expenses were ‘tax deductible’. This did not pass the ‘sniff’ test – but some accountants were recommending it nevertheless. It was tax avoidance without question.
We spend our life navigating between the desire of our clients to pay the least tax possible and the heavy hand of tax legislation, which can ‘grind exceeding fine’*. In other words, the IRD don’t move quickly, but when they move, they can grind you down to a very fine powder.
We don’t want that for you. You pay us to keep you safe. But you also pay us to make sure you’re paying the least amount possible. That’s the grey area in which we live and work. If you’re unsure with our treatment of any item, the best thing is to chat to one of our friendly team who will be able to lay out the likely risks and rewards – ultimately the decision rests with the you, the taxpayer, but we are here to provide you with all the information to make the best decision.
Paying your fair share of tax is the law, paying too much is not – we’re here to help you find the perfect balance between your obligation and your desire for that holiday!
*(“The mills of the gods grind slowly, but they grind exceeding fine” Sextus Empiricus 6th century BC (really!))
Code of Ethics for Beany
- Integrity: Honesty and straightforwardness in professional and business relationships
- Objectivity: Avoid the impact of biases on our judgement, decision making or allow undue influence on others or ourself.
- Professional competence and due care: Maintain professional knowledge and skill at the highest standard expected by a member of the public when seeking professional advice. We keep up to date with current trends and technical standards
- Confidentiality: Respect the right of our clients to have personal details and information kept secure, private and confidential.
- Professional behaviour: Compliance with laws and regulations relevant to where we live and do not behave in a way that reflects badly on us, on Beany or our profession
