Lack of planning is often the biggest mistake that taxpayers make.

A transaction’s facts and nature cannot be changed once it has been completed, which the tax liability is based on. Planning beforehand will assist the taxpayer in understanding the tax liability, the timing, disclosure requirements and possible alternatives. Bear in mind that masking a transaction to hide the true nature and purpose will not help. Tax planning and avoidance boils down to management and planning of following 4 fundamentals:

  1. Timing (when tax liability will be due)
  2. Gross income (tax liability is created by having an income)
  3. Income or capital (tax treatment of capital gains is different from that of income)
  4. Deductions (deductions against gross income will reduce the taxable income)

In planning the timing of the transaction, the availability of cash flow to the taxpayer should be considered so that it can be settled in time. It is counterproductive in your effort to pay less tax to accrue penalties and interest. Planning also included understanding the nature of the transaction and terms of the contract.

What is the reason for the liability to be paid or received? The associated expenses and capital input required must be understood with regards to a transaction. How is such expenses or capital funded? How is the transaction structured and recorded could make the difference in the taxpayer’s right to claim a deduction or allowance.

Tax avoidance is not obtained by changing the perceived nature of a transaction after the fact, but by understanding the nature, options and risks before the transaction is concluded. The reality is that tax will still be paid. You can only structure your affairs in such a way as to pay the least amount of tax permitted by law.