What’s the difference between:
Tax fraud;
Tax evasion;
Tax avoidance; and
Tax mitigation?
Why does it matter?
An example of tax fraud could include charging GST on sales when you have no intention of paying that GST to the IRD. Examples of tax evasion could include consistently selling goods on Trade Me and not declaring the income, or the failure to declare interest earned on overseas bank deposits. Tax evasion and tax fraud can lead to jail time, as well as high penalties. Tax fraud and tax evasion involve illegality.
What about tax avoidance? Defining what is tax avoidance can be difficult but generally it does not involve illegality. Many people who have found themselves in this category probably believed that they were acting legitimately in structuring their tax affairs. In determining whether an arrangement constitutes tax avoidance the IRD will look at a number of factors, including: whether tax minimisation is the dominant reason for the arrangement, the economic reality and economic effects of the arrangement, and whether the tax outcome is different from Parliament’s intention.
Some examples of unacceptable tax avoidance include:
Professionals diverting income from their personal work through trusts and companies in order to pay less tax.
Selling your family home to a company and then renting it back. The company deducts interest, rates and other expenses in its tax returns.
Using loans from a trust to fund your living costs, where the economic reality is that the loans are in the nature of income but no tax is being deducted from payments made.
If the IRD (or Court) deems that your arrangement constitutes tax avoidance, penalties, interest and tax will be payable. The amount due can easily become very large, especially if more than once tax year is involved or if the arrangement is an older one (so that penalties and interest have had longer to accumulate). In one case, an employee of a multi national was unaware that he had become a New Zealand tax resident. The IRD determined that he owed $350,000 in back taxes, penalties and interest. In another case the total payable amounted to $2.3 million.
What about tax mitigation? Tax mitigation involves acceptable tax planning. It has been called “sleep at night” tax planning. Tax mitigation involves finding tax efficient ways to structure business transactions. The tax effects remain within the letter and the intent of the law. Taxpayers are entitled to take account of potential tax savings when making business decisions but this should not be the dominant purpose, nor should artificial structures be put in place.
There are many grey areas and careful advice is needed to ensure that the correct business and tax decisions are made and so that you know where you stand. Please ask if anything is unclear.
Tax fraud;
Tax evasion;
Tax avoidance; and
Tax mitigation?
Why does it matter?
An example of tax fraud could include charging GST on sales when you have no intention of paying that GST to the IRD. Examples of tax evasion could include consistently selling goods on Trade Me and not declaring the income, or the failure to declare interest earned on overseas bank deposits. Tax evasion and tax fraud can lead to jail time, as well as high penalties. Tax fraud and tax evasion involve illegality.
What about tax avoidance? Defining what is tax avoidance can be difficult but generally it does not involve illegality. Many people who have found themselves in this category probably believed that they were acting legitimately in structuring their tax affairs. In determining whether an arrangement constitutes tax avoidance the IRD will look at a number of factors, including: whether tax minimisation is the dominant reason for the arrangement, the economic reality and economic effects of the arrangement, and whether the tax outcome is different from Parliament’s intention.
Some examples of unacceptable tax avoidance include:
Professionals diverting income from their personal work through trusts and companies in order to pay less tax.
Selling your family home to a company and then renting it back. The company deducts interest, rates and other expenses in its tax returns.
Using loans from a trust to fund your living costs, where the economic reality is that the loans are in the nature of income but no tax is being deducted from payments made.
If the IRD (or Court) deems that your arrangement constitutes tax avoidance, penalties, interest and tax will be payable. The amount due can easily become very large, especially if more than once tax year is involved or if the arrangement is an older one (so that penalties and interest have had longer to accumulate). In one case, an employee of a multi national was unaware that he had become a New Zealand tax resident. The IRD determined that he owed $350,000 in back taxes, penalties and interest. In another case the total payable amounted to $2.3 million.
What about tax mitigation? Tax mitigation involves acceptable tax planning. It has been called “sleep at night” tax planning. Tax mitigation involves finding tax efficient ways to structure business transactions. The tax effects remain within the letter and the intent of the law. Taxpayers are entitled to take account of potential tax savings when making business decisions but this should not be the dominant purpose, nor should artificial structures be put in place.
There are many grey areas and careful advice is needed to ensure that the correct business and tax decisions are made and so that you know where you stand. Please ask if anything is unclear.
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