Tax planning or tax avoidance? Do you know the difference? While tax planning is a legitimate and legal way to arrange your financial affairs to keep your tax to a minimum provided you make the arrangements within the intent of the law. Any tax minimisation schemes that are outside the spirit of the law is referred to as tax avoidance and attracts the ATO’s attention.

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 by 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 may also exploit the social/environmental conscience of people or their generosity. As different as these schemes are, the common thread often involves reducing taxable income, increasing deductions, increasing rebates, or entire avoidance of tax or other obligations.

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 non-concessional cap manipulation, life interests over commercial property, dividend stripping, some types of limited recourse borrowing arrangements, and personal services income as areas of concern.

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.

Whilst a 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.

In some instances, there may be a very fine line between what ATO considers to be tax planning and tax avoidance. To ensure that you’re not penalised for entering into potentially illegal schemes unknowingly, if you’re unsure, or if something seems too good to be true, it is always prudent to consult a registered professional.