Tax evasion and Tax avoidance – the basics
Nobody likes paying tax but it is one of those things that everyone will pay in one form or another. Unfortunately, there will always be those individuals that will do anything to NOT pay tax. Personally, I don’t understand why they do this but it happens. It happens all over the world, whether it is admitted or not by that country. So what is tax evasion and tax avoidance, let’s get into the basics.
For the purposes of this article, “tax” is income tax. This is tax paid on profits but it can be applied to any type of tax.
Illegal versus legal
There are 2 different terms involved here and they are two distinct concepts related to taxes.
1. Tax Evasion is illegal. It involves deliberately misrepresenting or concealing information to reduce tax liability,
Examples are not reporting income, inflating deductions, or hiding money in offshore accounts.
This can (and hopefully will) lead to penalties and interest and possibly criminal charges. In recent times, South Africa have had cases where the people involved have been sentenced to prison.
2. Tax Avoidance, (also known as tax planning) on the other hand, is legal. It sounds illegal but it just because the words used have a connotation towards it.
It refers to the use of strategies and methods to minimize tax liability within the framework of the law. The important words here are “within the law”. This might include taking advantage of tax deductions, credits, or other provisions in tax law to reduce the amount owed.
An example here is a company making donations to a registered charity. They are allowed to make donations as everyone is BUT They will get an tax reduction of the amount up to 10% of their taxable income (profit). This is in South African tax law. This is perfectly legal and gives the public a good view on the company for helping that charity.
Tax evasion and Tax avoidance – what’s the difference?
When it comes to the difference between the 2 terms, it is easy enough to find out whether it is legal or not. All one has to do is to contact the revenue collection service and ask them. Sometimes, their website will offer you the answer.
In summary, tax evasion and Tax avoidance are different. Tax evasion is illegal and involves deceit, while tax avoidance is legal and focuses on efficient tax planning.
Her are some more tax articles:
Contact Bruce on bruce@bcas.co.za or 081 529 5129
Any tax information or advice given by BC Accounting Services can be verified by contacting the South African Revenue Services (SARS) or looking on their website, www.sars.gov.za.