By: Melissa Browne
The late Kerry Packer famously said, “I don’t know anybody that doesn’t minimise their tax … Of course I’m minimising my tax. If anybody in this country doesn’t minimise their tax they want their head read. As a government I can tell you you’re not spending it that well that we should be paying extra”.
At the heart of Packer’s comments lies the dilemma we face when it comes to tax. Most people I meet in my role as accountant and adviser understand the ethical reason to pay tax: it funds our roads, public medical facilities, public schools and more. They also don’t want to wind up in a court battle with the Tax Office, as Packer did – sure, he won his case, but most people find legal action expensive, stressful and time-consuming.
But nor do they want to pay unnecessary tax because they haven’t taken advantage of legal tax minimisation options.
The Tax Office has strong views on tax minimisation versus tax avoidance. Tax minimisation cannot be at the heart of how we’re managing our affairs otherwise the Tax Office would potentially look through arrangements and call it a sham. The Tax Office has been gradually attacking trusts and closing other loopholes – for example, the so-called “Pitt Street farmers” or “Collins Street cockies” can no longer claim tax losses because their holiday house doubles as an unprofitable hobby farm.
The question is, do we stop minimising tax because the Tax Office might have a problem and close a loophole? Or do we understand where the Tax Office has drawn the line this year and, understanding that it might change again next year, carefully step up to it without stepping over it?
In my view it’s the latter. As Goldilocks discovered, it’s making sure the amount of tax you’re paying is not too much or too little but just right.
So how do you know what the right amount of tax is, and where the line is drawn? What are some areas that Tax Office looks at when considering tax minimisation and tax avoidance?
The cash economy and benchmarking
There have been many times when I’ve sat across from a new client and after reviewing their financials, asked them about the cash going through the business. I enjoy looking like a mind reader as I slide a piece of paper across the desk and ask them if that is the amount of cash.
The responses are varied but what they quickly realise is if I can pick their cash within five minutes, then the Tax Office is probably going to figure it out too. Through benchmarking, income and assets audits and data matching, the Tax Office can easily figure out if you’re declaring less than what you’re spending. Which is why it’s far better to minimise tax in legal ways and build assets rather than avoid tax and risk the Tax Office selecting you for a “please explain”.
Of course, the added advantage of putting your cash back in the business is it’s easier to obtain finance and your business will be worth more when you sell. Plus, you can buy those toys, go on those holidays and post them on social media without fear the Tax Office will be watching and catch you out.
Personal Services Income (PSI)
The PSI rules were designed for the IT profession when banks were sacking IT departments and then rehiring them as contractors the next week.
These rules have been extended to capture anyone who is essentially being paid for their labour skills or expertise. There are guidelines that dictate whether you’re a personal services business or not but if you are caught then you may be restricted in the expenses you can claim and your taxable profits must flow to you, which can mean higher tax payable.
Of course, just because you’re caught by the PSI rules doesn’t mean you have to throw up your hands and do nothing. You may still have the choice to convert your PSI income into a genuine business by changing how you’re working, hiring professional staff to help you perform your tasks, outsourcing and more.
Structuring
Often the default when starting a business is to set up a company or a business name. Or when purchasing assets, they’re simply purchased in the taxpayer’s own name. Structuring is an easy way to minimise tax and, more importantly, to protect assets.
That may be using a self-managed super fund or trust to purchase property instead of purchasing in your own name, setting up a unit trust instead of a partnership to invest or running a business or holding your shares in a discretionary trust instead of your own name.
While a structure can seem like a good idea, the Tax Office can look at the timing or set-up, how it’s being used, whether market wages are being made and more and decide the structure is solely for tax avoidance not tax minimisation. Which is why it’s so important to understand when you can change structures, what structure you should use, how it should be run, who should own your shares and more.
Schemes
There is an old saying that if something seems too good to be true, it probably is. If you’re presented with a scheme such as olives, alpacas, glow worms, drag queen ostriches or one of the many other schemes that exist, always ask to see the ATO product ruling.
This provides certainty that you’re engaging in an investment with the added benefits of tax minimisation and not a tax avoidance scheme. Of course, it must be said that the investment should be the primary reason for investing, not the tax deduction.
When it comes to taxes you can choose to be lazy, you can choose to be an ostrich, you can choose to run the gauntlet or you can choose to proactively and strategically minimise tax, protect your assets and stay within the Tax Office’s good graces while you do it. That might sound like a fairy tale but with a great accountant, you might just find that fairy tales can come true.
Source: Sydney Morning Herald