Overview of tax planning, tax avoidance and tax evasion

Photo: Natee Meepian, Bigstock

As a person living in a country with rules, it is only natural to pay taxes as one of the ways to follow the rules. It doesn’t matter who you are, how influential you are and how much money you make, you still have to pay taxes.

However, if you are a small business owner, managing your income can be a daunting task as you have to pay income taxes. For that reason, business owners are trying various ways to ease their income taxes, including tax planning, tax avoidance, and tax evasion to small business tax

However, as a business owner, you should also consider which of these methods is the right one, as you may face the law if you are not careful. Do not worry; this article will help and guide you through the comparison between tax planning, tax avoidance and tax evasion so that you can get a better understanding of each of them and know what to do from there. Let’s start!

Tax planning

Tax planning is the method business owners use to reduce their tax liability without breaking the law by taking full advantage of deductions, exemptions, rebates, and allowances deemed eligible by the government.

With this method, the government approves that all taxpayers have the right to manage their financial affairs in a way that can reduce their tax liability, as long as it is done within the law. This method is usually considered a “white” method because it involves taking advantage of certain exemption notices, claiming eligible deductions from taxable value, transferring tax subjects or objects to some countries categorized as tax havens or some countries that give special tax treatments to certain types of income, and much more.

tax evasion

Tax avoidance is the conscious gain of benefits to pay as little tax as possible by arranging financial matters that the government has not anticipated so that it is not considered illegal. This method involves twisting the rules of the tax system and taking advantage of the loophole.

Some common examples of tax avoidance practices include: contributing to a retirement account before the tax deadline and claiming the deductions afterward, getting paid through private companies, making charitable donations abroad to reclaim taxes, and much more. Tax avoidance can be considered a “grey” method as it is not technically against the law; however, it is an immoral act that can kill the spirit of the law or the tax system.

That said, if you’re not careful, it could backfire one day, and the consequences could come with a heavy penalty by law or jail time.

tax evasion

Tax evasion is the method of minimizing tax debt by illegally avoiding tax (violating the law). This method includes concealing facts (decreasing income or increasing expenses), data manipulation, fraud or conspiracy to evade tax and minimize tax liability while “hiding” from the law. This is not recommended as it is strictly against the rules, and if caught you would be punished either by fines or prosecution.

Illustration of the difference between tax planning, tax evasion and tax avoidance

In this section, we are going to give you some insights about the difference between tax planning, tax evasion and tax avoidance with a simple illustration. For example, the government grants tax exemptions for several years if your industry is set up around the specific area in Western Australia to promote industrialization in these areas.

It can be considered tax planning if you set up your manufacturing facility in Western Australia. However, it is called tax avoidance if you set up your manufacturing facility elsewhere and bring nearly ready-made products to Western Australia to do minor operations such as testing, packaging, etc. and sell from Western Australia. This clearly ignores the government’s true purpose of encouraging industrialization in Western Australia.

In terms of tax evasion, you could be considered to be using the method of tax evasion if you manufacture and ship the products elsewhere, but then collect sales invoices from Western Australia to prove that your products were manufactured and sold from Western Australia.

Hopefully the above illustration gives you a clear idea of ​​the difference between tax planning, tax avoidance and tax evasion. In short, tax planning is legal, tax evasion is illegal, and tax avoidance is somewhere in between. Aside from tax evasion, both tax planning and tax avoidance are legal; while tax avoidance doesn’t break the law, it still ignores the true meaning and purpose of law making.

On the other hand, tax planning is highly recommended because not only do you give transparency to the government, which the government fully approves, but you can also deduct your tax debt in legal ways that would give you long-term benefits and relief. you from so much pressure in the future. That’s why we recommend using tax planning methods to help you with legal tax deductions or exemptions that would keep your business running smoothly and in peace.


Shreya has been with australiabusinessblog.com for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider australiabusinessblog.com, Shreya seeks to understand an audience before creating memorable, persuasive copy.