Legal Issues

Tax avoidance is the use of legal based methods in order to lower the amount of the income tax that is owed. It is the legal use of the tax regimentations to take a personal advantage by reducing the amount of tax payable according to the law. It is also called tax mitigation. Most taxpayers use a variety of methods to reduce the amount of tax they are supposed to pay. Some of them use some loopholes in the law or take advantage of some misinterpretations in the law to avoid paying the right amount of tax. This paper will look at the ITAA laws in Australia and make a discussion concerning loopholes in the anti avoidance statutes


Preview

The income tax assessment act 1936 is an act that was passed by the Australian national assembly and it is the main statute where the calculation of income tax takes place. The act has been rewritten and is now incorporated in the income tax assessment act of 1997 and the 1997 act is still being improved upon to encompass emerging issues in the world of taxation. Tax avoidance is the use of legal based methods in order to lower the amount of the income tax that is owed. It is the legal use of the tax regimentations to take a personal advantage by reducing the amount of tax payable according to the law. It is also called tax mitigation (Loman, 2001). Most taxpayers use a variety of methods to reduce the amount of tax they are supposed to pay. Some of them use some loopholes in the law or take advantage of some misinterpretations in the law to avoid paying the right amount of tax.

One of the most common statutes in the ITAA is the anti avoidance statute or law that has been misused by the wealthy at the expense of the employees due to lack of clarity and very many loopholes. The anti avoidance laws that are found allover the Income Tax assessment Act (ITAA) are meant to prevent the tax payers from subverting the regulations that are underpinned by this law. The proposition in the law assumes that there is a vivid policy that is discernible in the ITAA but there no truth in this (Melvin, 2009). If you look at the rules that govern the alienation of income, there is an allowance for the wealthy to vest assets that produce income which include business premises and real estate, in entities such as companies and trusts such that the associates that are lowly taxed pay tax themselves rather that the tax being imposed on the wealthy people who run these entities. There are specific anti avoidance provisions that are within the ITAA that reflect on the political decisions that are ad hoc instead of making rigorous application of sound tax policy (Melvin, 2009). With little planning, income from the property can attract special attention. This means that there must be a new approach to define income before attacking the alienation and the anti avoidance laws (James, 2002. The new approach of defining income would not require anti avoidance provisions because the judicial system can affect the vivid policy intention of the law making process (Melvile, 2009). Unless these kinds of changes take place, the anti avoidance regulations may just be exposing the policy shortcoming of the income legislation which are supposed to ensure that there effective policy settings within the income tax act which it should protect. This means that there is a trick being played by some tax payers who are actual winners in a way that cannot be clearly visible. The tax games are being played especially by strategically placed individuals and companies. The taxpayers who avoid taxes using legal loopholes appear as if that are winning and they believe so, but the reality that they may be winning but the amount of loss they create for everyone is magnanimous and the consequences are cyclic and they come to affect the same tax avoiders indirectly (Nugget,2009).

The tax games
This trick being played by the wealth tax payers by taking advantage of the slack legislations allows them to circumvent the top rate of 39 percent personal rate by making an interposition of a partnership company or trust which makes their employees pay tax and even at a higher rate. This is what affects the employment income of the employee because of the cushion given to the employers by the loopholes in the tax policy. This means that this situation can only be countered by an attribution rule that should apply for the income tax only. The attribution rule will address the need to protect the PAYE foundations because of the way the wealthy have affected their income especially after the increase of the top personal tax rate that shot up to 39 percent and the simple avoidance mechanism should be targeted at the employees in bid to relieve them from the burden posed to them by the cunning employers who have taken advantage of the slack legislation to cushion themselves financially (Wallin, 1998). The general anti avoidance rules can be used to counter such avoidance activities by the wily employers. Though they may be time consuming and expensive to implement, the rules can be relied on to counter the imminent increase in the cases of income alienation by the employees to circumvent tedious court cases that are arising every day due to the complications.

 The attribution rule will apply in the cases an employee has an employment relationship that is structured and in the interposition of different entities and to the employer. This means that if income suffers from diversion, alienation to a person who is associated, there will be lower marginal rates of tax and the effect of the attribution rule will be to attribute the specific person and not the employer (Salanie, 2000). This means that the net income will not be affected by any deductible expenses that would have been deductible under the previous rule thus making the employers to escape that bit of taxation that they are supposed to be responsible for but they end up passing the burden to the employees. In this case, the game played by the employers will be cut short if the rule goes deeper to search explanations that will be able to legally define substantial assets. This is because the current rule does not recognize substantial business assets as depreciate assets that cannot be used privately. In this case, the amount attributed under the current rule is lesser that the net income of the services of the associates and this allows the reduction of the amount of tax that the employer will pay, without the rule taking into consideration that the amount that the employer is exempted under the existing circumstances are passed on to the employees indirectly meaning that they are overburdened by something that the employer should have been responsible for.

Approach in defining income
Income can be regarded as a personal service income if it is factored in as a reward for the personal skills of the efforts of an individual and this will apply, skills notwithstanding. It will also apply regardless of whether the income was received directly by that individual or received by a firm, trust or a partnership which are broadly referred to as personal services entities. This means that the laws should not affect someone who has some workplace arrangements with the clients because that taxation will be personal and not tied to the personal services entities (Kahn, 2009). This means that the employers should not therefore link the personal services entities with their personal alienation income provisions at the expense of their employees (James, 2002). This because, according to this approach of income definition, people who qualify for personal services business must obtain a determination from the ATO confirming that in fact they are  in personal business services. This means that the general anti avoidance provisions of part four will know be clear in application to schemes that will reduce the income tax by the action of splitting (Melvin, 2009).

This approach to the definition of income will clarify the deductions that will be made against any one who is affected by the personal services limits of income. This will now create a rift between the private and the business taxation limits meaning that the taxation for business will not be categorized as private meaning that the cushion the employers have been getting due to this invisible overlap will cease to be there and the un called for burden that the employees have been shouldering on behalf of their wily employers will now be transferred to the employers because under this approach, it is very clear what an income is and which category should business income and personal based income is taxed in. the business premises test is one of the four business services trials that can determine whether a personal business falls within an income year meaning that if the personal business is not being conducted within an income year, then it is highly possible that the change in tax law will not change the taxation dynamics for the business (James,2002). To save the employees from the exploitation of the employers through  double taxation, this test allows the personal business entity to meet the test in reference to the personal services income that have been set by the anti avoidance laws.

Discussion

It is very clear that there is something wrong with the current state of the law that enables a variety of taxpayers to exploit the loopholes in the law to cut the amount of tax that they are supposed to pay. This is why it would be correct to call these loopholes as avenues for tax games that the taxpayers play as they seek to defraud the tax master. There is no way in which the law can catch up with them in its currents states because they will end up weaving their way in and out making it hard for rulings to be made against them. This means that it is the wealthy who can manage to twist the personal tax provisions and the business services provisions that will benefit from the game because the business provision will be covered under the private tax because of the loophole that exists in the income alienation laws (James, 2002). This helps them to put their assets like the business premises, houses for rent, vehicles for business and other business related assets under the trust entities that make a mockery of the tax policies (Harper, 2009). What is important in the reform of the law is the mending of this loophole by ensuring that the provisions under the anti avoidance laws stay clear of political decisions that are arbitrary and focus on the application of the tax policy. This will ensure that there is no avenue left for the wealthy to exploit the political cracks in the legislations to cut the amount of the tax that they submit to the state (Silverman, 2000).  This will also ensure equality because the ordinary citizen, most of whom are the employees to these wealthy class are often disadvantaged because, first, there is they do not have such a wide avenue to take advantage of the taxation law loopholes to make a cut on the amount of tax that they pay to the state and secondly, when the wealthy ones play this game, and avoid paying the correct amount of tax, the discrepancy in what they pay and what they are supposed to pay is usually reflected in the deflated incomes of the employees meaning that the amendment of the taxation laws will largely benefit the employees who have for years been exploited by their wealthy employers who have been hiding under some rules that have certain defects. This is why the attribution rule will come in handy to address the situation of avoidance.

The attribution rule will also add in another advantage in that it will clear the overlap between tax avoidance and tax evasion meaning that some of the actions that have been falling under tax avoidance will now be considered under tax evasion and this will easily scare away the potential offender because there are harsh penalties for tax evasion, but avoidance can be easily challenged by dancing with legal explanations (Fillebrown, 2004). This means that planning can help to make sure that income from the property can attract special attention in the realms of taxation and also remove avenues for avoidance So, there should be a new approach to the analysis of income before amending the alienation and the anti avoidance laws. This new approach would call for a better way of   defining income and would not require anti avoidance provisions because the judicial system can give effect to the vivid policy intention of the law making process. Unless these kinds of changes take place, the anti avoidance regulations may just be exposing the policy shortcoming of the income legislation which are supposed to ensure that there effective policy settings within the income tax act which it should protect (Cosa, 2008) that the tax games being played especially by strategically placed individuals and companies will be a thing of the past. The taxpayers who avoid taxes using legal loopholes appear as if that are winning and they believe so, but the reality that they may be winning but the amount of loss they create for everyone is magnanimous and the consequences are cyclic and they come to affect the same tax avoiders indirectly. The situation can be rectified by the installation of transitional arrangements that will relate to the alienation of the personal services income after consultation with various stakeholders. This will actually help the taxpayers who have been affected by the new income legislation that is aimed at curbing tax avoidance (Staples, 2000). This will call for the concessions where the penalties of the general interests charge are being applied. The kind of tax payers that should be targeted by this arrangement should include contractors and consultants especially those who operate under companies and trusts because they have the widest avenue for avoidance because most of the scope of their operation is not often reached by the law. Others that need to be targeted are entrepreneurs who operate multiple companies because in the process of operating these companies, avenues arise where tax avoidance can easily take place. This calls for a mechanism to establish the constituent structures of various consortiums that operate franchises and chains to ensure that the calculation of tax for each chain and franchise is independent otherwise the overall combination might also create avenues for the avoidance of taxes especially where personal and business interests meet.

 These arrangements will have a major impact on employers and taxpayers who use the various business entities under their personal business but will exempt those entities that provide public service or community service because their avoidance of tax is usually covered by the jurisdictions that they operate in meaning that theirs is actually a tax exemption and not avoidance per se (Aaron, 2003). Anti avoidance laws especially the current ones in the ITAA are just full of legal cracks that encourage tax payers to dodge the tax master and worse still, no legal follow up can be made easily because the tax offenders will use legal justifications in the ambiguous laws to escape the penalties that ought to be imposed to people who are found guilty of avoiding to pay taxes to the state in accordance with the laws stipulated in the anti avoidance statutes of the ITAA (Melvin, 2009).