The difference between tax evasion and tax avoidance
All business owners have faced the point of asking themselves “is this tax evasion? Or is it simply avoidance. Am I not simply practicing my right to plan my taxes in an effective and legal manner to reduce my liability?”
As most taxpayers know, tax avoidance is when a taxpayer arranges his affairs in a legal manner to reduce his tax payable whereas tax evasion is illegal activities where a taxpayer frees himself from a tax burden.
When considering evasion vs avoidance, there are different tax reducing acts which will depend on the tax type at hand. For example, tax evasion in the customs duty sphere would be illegally smuggling goods into the country without declaring them. Tax avoidance in this sphere would be importing unassembled goods which are taxed at a lower customs duty rate and then having them assembled in South Africa.
When considering Value Added Taxes, evasion on such would be deliberately understating sales or overstating expenses. Avoidance would be making use of all the available provisions in the Value- Added Tax Act which rightfully allow for you as a taxpayer to claim VAT on certain goods and services.
The Income Tax Act has implemented specific provisions to circumvent avoidance schemes entered into by taxpayers to prevent certain loopholes that have previously been used.
However, the general anti-avoidance rules in terms of The Income Tax Act draws a line between permissible and impermissible avoidance and states that any arrangement that was entered into that lacks commercial substance, in whole or in part, and that was entered into solely for obtaining a tax benefit, can be disregarded by SARS and penalties will be imposed. Therefore, perhaps one of the biggest questions you should be asking yourself when stepping into a grey area is “would I have entered into this transaction in a commercial setting if it was not for the tax benefit?”. The general anti-avoidance rules are there to prevent the misuse of grey area provisions in the Income Tax Act.
Tax evasion is considered a punishable criminal offence and can have the consequence of penalties up to 200%.
Tax evasion does not however only come in the forms of “underreporting ones income” and providing false information about expenses. It is not always as simple as determining that a drug lord who only deals in cash is clearly evading taxes and you giving up drinking excessively because of the high excise duties is clearly tax avoidance.
Most instances lie in between and are not that simple as determining whether it is evasion or avoidance.
The problem is that certain matters are not clearly enough written in the law and therefore fall subject to each taxpayer’s individual interpretation.
Unfortunately, it is not as simple as saying “the following acts amount to tax avoidance, and the following acts amount to tax evasion”. It is clear that there are some grey areas where there is a fine line between tax evasion and tax avoidance. Therefore, it is always smart to hire a competent, honest tax advisor who can offer expert knowledge on your specific grey area in order to prevent you from stepping over the line from tax avoidance into tax evasion.
Jade Els and Willem Oberholzer are Tax advisers for Probity Advisory.