Thought of the Week | What is the difference between tax avoidance and tax evasion?

There is a general misconception between the terms “tax avoidance” on the one hand and “tax evasion” on the other. The two terms can be confusingly similar but there is an important distinction between these tax terms that can have the result of the taxpayer being either on the right side or the wrong side of the law. Below we briefly explain the difference between tax avoidance and tax evasion.

Tax evasion refers to illegal activities deliberately undertaken by the taxpayer to free themself from tax liability. This would typically refer to a situation where a taxpayer does not pay the tax that would normally have been chargeable if the taxpayer made full and true disclosure of income and the allowable deductions. These activities commonly refer to fraud, falsification of returns, books and accounts, sham transactions, deliberate non-disclosure of income or the deliberate overstatement of deductible expenditure.

Tax avoidance on the other hand refers to a situation where the taxpayer arranges his or her affairs in a completely legal and lawful way that results in a reduced income or has no income on which tax is payable. Tax avoidance is completely legal and is seen as a way in which a taxpayer can protect his or her property from unnecessary taxes. An example would be where a taxpayer donates an interest-bearing investment to his major child in the amount of R 100,000.00 and would not be affected by the provisions of donations tax.

As famously quoted in the case of Duke of Westminister v IRC 1953:

“Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or is fellow taxpayers may be of his inequity, he cannot be compelled to pay an increased tax.”

In conclusion, a taxpayer may arrange their affairs in a perfectly legitimate way to avoid paying unnecessary taxes. However, deliberately evading tax payments remains illegal.

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