Managing your financial affairs to minimise tax liabilities is a perfectly legal practice known as tax planning. When done within the framework of the law, it is a legitimate way to ensure that you’re not paying more tax than necessary. However, there is a fine line between legal tax planning and involvement in unlawful tax schemes, which can lead to severe consequences.
What are tax and super schemes?
Tax and superannuation (super) schemes refer to arrangements that exploit the tax and super systems for financial gain. While you have the right to manage your financial affairs to reduce your tax obligations, doing so must be within the bounds of the law. Unlawful tax schemes, which often involve tax avoidance or evasion, can attract the attention of the Australian Taxation Office (ATO) and lead to serious penalties.
Unlawful tax and super schemes: What to watch out for
Unlawful tax and super schemes typically involve deliberate attempts to exploit the tax and super systems. These schemes are often complex and may promise significant tax benefits that are not legally available. Some schemes may target self-managed super funds (SMSFs) to channel money inappropriately, either to avoid tax or to enable early access to super before the legal conditions for release are met.
These schemes vary in scope, ranging from mass-marketed arrangements to specialised schemes tailored for specific taxpayer circumstances. They may be promoted to individuals, small businesses, or large corporations, with the common goal of reducing tax liabilities through illegitimate means.
Warning signs of unlawful schemes
Promoters of unlawful tax schemes can come from various backgrounds, including accountants, lawyers, financial advisers, telemarketers, and even salespeople in shopping centers. It’s crucial to be aware of the warning signs of such schemes, which often include:
- Zero-risk guarantees: Promises of no risk are a red flag, as they are typically unrealistic in financial arrangements.
- Referrals to specific advisers: Be cautious if you’re referred to an adviser who is claimed to have special knowledge about the scheme’s benefits.
- Secrecy: Promoters may ask you to keep the arrangement confidential to avoid scrutiny.
- Fee structures: A fee or commission based on the tax saved is another warning sign.
- Discouraging independent advice: Promoters may discourage you from seeking independent legal or financial advice.
- Lack of a Product Disclosure Statement (PDS): Legitimate financial products should come with a PDS, which outlines important information about the product.
How schemes are structured
The structure of an arrangement can also indicate that it may be an unlawful tax or super scheme. Be wary of arrangements that involve:
- Deferring income to a later tax period.
- Hiding income, possibly in offshore locations.
- Reclassifying income to attract lower tax rates.
- Converting private expenses into business expenses to claim them against income.
- Moving income through multiple entities to obscure its source and reduce tax liabilities.
- Inflating deductions or creating artificial ones.
- Setting up a business solely for tax benefits without any genuine business purpose.
Financing schemes: A common red flag
Many unlawful tax schemes come with complex financing arrangements designed to meet your financial needs while reducing your tax liability. Warning signs include:
- Round robin financing: This involves funds being passed through multiple entities, often returning to the original entity.
- Non-recourse loans: These loans do not require repayment if the investment fails, which can be a red flag.
- Complex loan structures: Limited recourse loans and investments funded primarily through tax deductions may indicate a scheme.
Protecting yourself: How to ensure your arrangement is legitimate
Before entering into any financial arrangement, it’s essential to verify its legitimacy. Here’s how you can protect yourself:
- Seek independent advice: Consult an adviser who is not connected to the scheme or promoter.
- Check taxpayer alerts: The ATO issues alerts about schemes of concern, which can help you avoid risky arrangements.
- Verify adviser credentials: Ensure that your tax agent is registered with the Tax Practitioners Board and that your financial adviser holds a valid Australian Financial Services (AFS) license.
- Review the Product Disclosure Statement: A PDS provides critical information about a financial product and should be reviewed carefully.
- Apply for a private ruling: If you’re unsure about the tax implications of an arrangement, you can apply for a private ruling from the ATO.
The role of tax professionals
Tax professionals are often in a position to identify and prevent involvement in unlawful tax schemes. If you suspect that a client is involved in such a scheme, it’s crucial to report it to the ATO to resolve any issues before they escalate.
Reporting unlawful schemes
If you believe you’re involved in an unlawful tax or super scheme, it’s important to act quickly. Reporting your involvement to the ATO before an investigation begins may result in reduced penalties. You can report a scheme confidentially through the ATO website or by contacting them directly.
Key takeaways
Understanding and recognising the warning signs of unlawful tax schemes is crucial in protecting yourself from significant financial risk and penalties. Always ensure that your tax planning strategies comply with the law, and seek independent advice if you’re unsure. Remember, if something seems too good to be true, it probably is.
