Tax minimisation versus tax evasion - the importance of considered tax planning

Structuring acquisitions and disposals in a tax effective manner is an important consideration in any transaction, but when does ‘normal’ tax planning become too aggressive?

Consider this scenario:

Your company is considering a major acquisition. Your tax advisers have suggested some ‘tweaks’ to the acquisition structure, which will result in considerable tax savings. Are you interested?

Structuring acquisitions and disposals in a tax effective manner is an important consideration in any transaction, but when does ‘normal’ tax planning become too aggressive?

In this article BDO Tax partner, Tim Sandow, explores tax planning from the perspective of the tax adviser, the changing public expectations around tax planning and the questions directors should be asking.

The tax adviser’s perspective

Registered Tax Agents must abide by the Tax Agents Code of Conduct. This includes a requirement for the tax agent to “act lawfully in the best interests of your client”. From a tax planning perspective, this means the tax agent should be bringing ideas to their clients which lawfully reduce the amount of tax they may pay.

But what about if that tax planning includes exploiting a ‘tax loophole’ within the confines of the law? Maybe your unique fact scenario means the tax provisions can lawfully apply to reduce the amount of tax you are paying, even though the law is being applied in a way that was not contemplated by the legislatures.

There has been a lot of discussion globally about whether there should be an overriding ‘public interests’ test. Such a test could suggest that while the tax loophole exists, ethically the tax adviser should not be advising a client to exploit it. However, attempts to articulate such a test have so far proven difficult. Instead, the proposal is that while a tax adviser can advise a client that such a loophole exists, they also have a duty to inform the client that this is not how the law was intended to apply and the client risks reputational damage if they exploit the loophole.

Changing public expectations

Tax loopholes can exist which create significant tax planning opportunities in ways not originally anticipated. For example, when the Rights To Future Income amendments were introduced in the Tax Consolidation Provisions in 2010, financial institutions were lawfully entitled to claim billions of dollars in tax deductions before the law was changed.

While no-one likes paying more tax than they need to, large corporations are increasingly facing more public scrutiny. 

Although, not a tax, some companies who received JobKeeper payments throughout 2020 – 2021 found themselves facing intense public pressure to repay the payments they had received, particularly where it became apparent that COVID-19 had not impacted their profits as severely as first predicted. For these companies, there was no suggestion as to whether they were lawfully entitled to receive the JobKeeper payments. Instead, the question asked by the public was whether it was right for them to keep the payments, i.e. morally should they repay the amounts. Some companies decided that even though they were lawfully entitled to the payments, they chose to repay the amounts to minimise the reputational risk.

The director’s perspective

A director’s duty is “to act in good faith in the best interests of the corporation”. So, what should a director do when presented with a tax planning opportunity that could save the company a significant amount of tax?

Similar to above, there has been a lot of debate about whether a director’s duty to act in good faith extends to other stakeholders. It is also suggested that the duty requires directors to take a long-term view and the actions they take now should not risk longer-term damage to the company. Arguably, saving a significant amount of tax now is acting in the best interests of the company – as long as it doesn’t risk longer-term damage to the company, particularly its reputation.

What questions should directors be asking?

How confident are we that the tax planning recommendation presented by the tax adviser is actually lawful? Directors are not expected to be tax experts, but there is an expectation the director will be professionally sceptical. If it sounds too good to be true, it’s appropriate to make further enquiries:

• What level of confidence does the tax adviser have in the idea – is there a ‘reasonable arguable position’? (If not – reject it immediately!)
• Are others in our industry taking advantage of the idea?
• Does the recommendation seem complex, involving steps which wouldn’t be necessary to achieve the commercial result?
• How can we minimise the risk – do we seek a second opinion from another tax adviser, Counsel’s opinion, or obtain a Private Binding Ruling from the Australian Taxation Office (ATO)?
• What is the bigger picture for the long term of the company? For example, if the company is working towards a capital raise, IPO or trade sale – while tax planning can save some cash in the short term, it shouldn’t be at the risk of creating a complex unworkable legal structure which needs to be unwound in the future, or significant concerns arise during a Due Diligence Process resulting in amounts being held back for a period of years or even the deal not proceeding. 
• What are the consequences if the tax planning idea is implemented, and it is successfully challenged by the ATO? Is the company exposed to repaying the tax, penalties and/or reputational damage?
• How does the tax planning idea fit with our Tax Risk Appetite Statement?
  • The ATO began focusing earnestly on Tax Governance from 2017 as part of its Justified Trust program. At the time, many companies put together a Tax Policy where they articulated their Tax Risk Appetite. Best practice suggests Risk Appetite Statements should be reviewed annually to confirm they are still appropriate considering changes in law and public expectations. Does your company have a Tax Risk Appetite Statement? When was the last time it was reviewed?

It is appropriate for companies to consider tax planning ideas, but always with an eye to the long-term future of the company.

Learn more about how BDO can support your organisation in structuring your business, tax planning and minimising your tax obligations.

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This article was originally published by the Australian Institute of Company Directors.