Is It Tax Evasion or Tax Avoidance?

The Tax Office is becoming increasingly sophisticated in identifying tax cheats.

The Tax Office has published benchmarks which provide a guide to the expected profitability of over 100 businesses and has a data-matching program which identifies those not lodging returns or not reporting all their income. More than 500 million transactions were matched in the past year.

As part of its audit program, the Tax Office highlighted its review of coffee shops and hardware stores suppliers. It has information about coffee shops buying more than 15 kilos of coffee a week from suppliers and those shops will be checked to ensure they are reporting all their income.

In the period July to September last year, the Tax Office says close to 500 people and companies were prosecuted and convicted of taxation and superannuation offences and 12 people received prison sentences.

Tax evasion occurs when a taxpayer deliberately does not report to the Tax Office all the income they should have reported, most commonly associated with the cash economy, or claims tax deductions they know they are not entitled to claim.

In more sophisticated arrangements such as Project Wickenby schemes, otherwise deductible expenses are artificially inflated by the interposition of a sham tax haven entity between a taxpayer and the true supplier.

Those intentionally making a false or misleading statement to the Tax Office can be subject to an administrative penalty equal to 75 per cent of the tax sought to be avoided. Alternatively, they might be subject to a criminal penalty. If a taxpayer intentionally keeps false records, the maximum penalty is currently $5,500 and/or 12 months imprisonment for a first offence and $11,000 and/or two years imprisonment for any subsequent offence.

If you are caught evading tax, one option is to go cap in hand and make full disclosure. Tax Office practice in such instances is to reduce the penalty. It is unlikely that where there has been voluntary disclosure the Tax Office will refer the taxpayer to the Director of Public Prosecutions, but that is always a risk.

If you decide to take the risk that you will never be caught but are then caught by the Tax Office, you will both be subject to pecuniary penalties and be more likely to be subject to criminal penalties.

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