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8 March 2012
Chances are you've probably never met anyone who wants to pay more tax than they actually have to.
Like many, you might plan to legitimately minimise your tax through arrangements that reduce your taxable income, or by increasing your claimable deductions. Perhaps you have negatively geared an investment property or made donations to a charity.
These are examples of legal tax minimisation strategies. However, there are also arrangements that take things a step further known as 'tax avoidance schemes'. It's not always easy to tell the difference and to make sure your arrangement is legal. You don't want to end up with unforseen tax consequences such as paying more tax and incurring penalties.
Some arrangements are clearly tax schemes, however, others may sound legitimate on the surface, but after further investigation aren't quite as they seem.
Let's have a look at a couple of examples:
Chris decided to buy an investment property at the same time as his friends Kate and Simon. Chris plans to use negative gearing to minimise his tax. Kate and Simon, however, see an ad for a 'wealth creation' seminar that promises them a way to use their investment property interest payments to pay off their home loan faster. Very excited by this opportunity, Kate and Simon try to talk Chris into the same arrangement. Chris thinks the arrangement sounds 'too good to be true' but Kate and Simon assure him it has the backing of genuine experts and go ahead and commit to the arrangement.
Unfortunately for Kate and Simon, the arrangement turned out to be a tax avoidance scheme and they ended up with a big tax bill and penalties to pay. Chris is now one step up on the ladder to 'wealth creation'.
Then there's Donna. Donna has always given generously to various charities. Having travelled extensively, when she hears about an arrangement that offers to send medicine to a developing overseas country, she's very keen to be involved. Donna signs an agreement to make a donation for 10% of the cost of the medicine and finance the rest through an uncommercial loan from the vendor. She is given a receipt for what she is told is the appropriate cost of the medicine which she claims on her tax return.
Unfortunately for Donna, this agreement is a tax scheme and she ended up losing her money and having to pay a large tax bill.
Like Kate and Simon, Donna found out that not getting the right advice from someone independent, and relying on the advice of the person selling the arrangement, can lead to negative tax consequences and leave you with unforseen tax liabilities.
The ATO's website has information on many different types of arrangements and helps you understand when an arrangement is outside the law. To find out more, visit www.ato.gov.au/taxplanning
Last Modified: Thursday, 8 March 2012