Deck 14: Ethics, Tax Avoidance and Evasion

Question 1

Abe is a self employed plumber. He records his invoiced jobs but the private jobs he does on weekends for cash are not reported. How would non-reporting of cash income behaviour by Abe be best described for tax purposes?

A) Tax avoidance
B) Tax evasion
C) Tax planning
D) Tax minimisation

Answer 1

Tax evasion

Question 2

K Pty Ltd and M Pty Ltd agreed to prepare loan documentation under which K Pty Ltd agreed to repay certain interest on a loan. The parties did not intend the documents to give rise to actual transactions and no amounts of interest (pre-paid or not) were ever paid on the loan. How would this arrangement, under which interest was purported to be paid, be best described for tax purposes?

A) Tax evasion
B) Tax avoidance
C) Tax planning
D) A sham

Answer 2

A sham

Question 3

Alistair has a discretionary trust and this last year (2020); he has distributed $10,000 of the trust net income to his 8 year old son. At what rate of tax will this income distributed to the 8 year old son be taxed?

A) At ordinary marginal rates
B) At a flat rate of tax equal to the company tax rate
C) At Division 6AA rates (top marginal rate plus Medicare levy)
D) No tax will apply as the amount is below the tax-free threshold

Answer 3

At Division 6AA rates (top marginal rate plus Medicare levy)

Question 4

A couple (the Blarts) were advised by their financial planner to buy an investment property and to pay all their loan repayments only against the loan they had for their private property and to let the interest on the investment loan capitalise and thereby to let the balance of the loan on the investment property continue to increase as this would then provide for them additional deductions. Is this arrangement likely to be disallowed under the provisions of Part IVA of the Income Tax assessment Act 1936?

A) No. This is an example of tax avoidance
B) No. This is an example of tax evasion
C) No. This is an example of a sham
D) Yes as the taxpayers have no subjective intent to avoid tax

Question 5

Chevmon Australia Ltd is a subsidiary of Chevmon Co, which is headquartered in the USA and is a significant global entity. Last financial year, Chevmon Australia paid Chevmon Co $2 billion of interest on loans that Chevmon Co provided to the Australian subsidiary. If the interest rates charged on those loans by the US parent company were 5 times the interest rate that the subsidiary could have obtained, is this arrangement likely to be affected by Australia's new diverted profits tax?

A) No, as this is an intra-group transaction, there is no real tax issue at stake
B) No as different countries have different tax rules and tax rates
C) No, as this is tax evasion
D) Yes, this is exactly the arrangement that the diverted profits tax is looking to attack

Question 6

Egoism is an ethical principle which aims to promote what value more than any other?

A) When faced with a decision about how to behave, a person will and should do what is in their own best interest
B) When faced with a decision about how to behave, a person will and should do what is in best for the community overall and not loom at their own best interest
C) When faced with a decision about how to behave, a person will and should do what is in the 'right' thing to do because it is the 'right' thing to do
D) When faced with a decision about how to behave, a person will and should do what is the most virtuous choice, irrespective of self interest

Question 7

Dianne has donated $10,000 to a registered charity and deductible gift recipient. She will save $4,500 in tax as a result of this donation. How will this donation be treated for tax purposes?

A) This is an example of tax evasion
B) This is an example of tax avoidance
C) This is an example of tax planning
D) This is an example of a sham

Question 8

As Peter does not like paying tax he has decided to contribute $24,000 into his superannuation fund account on the 29^th of June. His contribution is within the concessional contributions limit. He has advised his fund (which is a complying fund) of his intent to claim a tax deduction for this contribution. How will this donation be treated for tax purposes?

A) This is an example of tax avoidance
B) This is an example of tax planning
C) This is an example of tax evasion
D) This is an example of a sham

Question 9

Boris worked for ABJ Electrical as an employee for 12 years but on 1 July 2019 he was asked by his employer to obtain an ABN and to submit invoices as he would be paid as a contractor. Boris's work duties have not changed at all and he only provides services to ABJ Electrical is still paid on a hourly rate and Boris does not supply his own tools or have his own liability insurance (as he is covered by ABJ's policy). How will this arrangement be treated under Australia's specific anti-avoidance rules?

A) Boris would fail the personal services income rules
B) Boris would pass the personal services income rules
C) Boris would be able to pass the results test
D) Boris would pass the unrelated clients test

Question 10

A decision to invest a large sum of capital at much lower interest rates, than can be obtained in Australia, in an overseas bank through a complicated series of transactions involving multiple countries, due to a provision that did operate at that time under Australia's domestic tax rules to treat such foreign income as tax exempt, is most likely to be viewed as tax avoidance under what set of rules?

A) A diversion of profits under the Diverted Profits Tax Act
B) The use of unlawful transfer pricing
C) The general anti-avoidance rules found in Part IVA
D) Tax avoidance under the multi-national anti-avoidance laws

Question 11

Deontological ethics is more concerned with what principles?

A) The emphasis is on doing what is best for oneself
B) The emphasis is on doing what is best for the greatest number
C) The emphasis is on the outcomes rather than on developing rules or principles
D) The emphasis is on developing rules or principles that are inherently ethical, rather than those that produce ethical consequences

Question 12

Which is not one of the 5 fundamental principles contained in APES 110Code of Ethics for Professional Accountants?

A) Integrity
B) Self-interest
C) Objectivity
D) Professional competence and due care

Question 13

Which is true for the effects of the Tax Agent Services Act 2009 and its Code of Professional Conduct on all registered tax agents?

A) The Code is optional and is intended more as a voluntary guide
B) The Code does not apply to registered tax agents
C) All registered tax agents must adhere to the Code
D) The Code does not apply if APES 110Code of Ethics for Professional Accountants applies

Question 14

Martin is a lawyer who earns $300,000 per annum. He also purchased a small farm in the Adelaide Hills (now worth $800,000) as a way to reduce his taxable income as he plans to sell just a few livestock every now and then. If in this last tax year Martin had sales of livestock of $14,000 (his total income from the farm) and incurred farm expenses of $38,000, can he use the loss from his small farming business to reduce the tax payable on his lawyer's salary of $300,000?

A) The farming activity loss would be deferred under the non-commercial loss rules
B) The farming activity loss would not be deferred under the non-commercial loss rules
C) The farming activity would pass the real property test and so not be deferred
D) The farming activity would pass the assessable income test and so not be deferred

Question 15

Which of the following is not one of the eight criteria to determine purpose as set out in section 177D (2) ITAA36?

A) The manner in which the scheme was entered into or carried out
B) The subjective intent of the taxpayer
C) The form and substance of the scheme
D) The time at which the scheme was entered into and the length of the period during which the scheme was carried out

Question 16

Simon has been a tax agent for the last 14 years. In the last 2 years he has not been keeping up with his professional development training and this has led him to make numerous errors in preparing his clients' tax returns. The Tax Practitioners' Board is investigating Simon, due to numerous complaints from Simon's clients, under the Tax Agent Services Act 2009. Which is the main attribute of the Code of Professional Conduct that Simon is likely to have breached?

A) Lack of Integrity
B) Lack of Objectivity
C) Lack of Confidentiality
D) Lack of Competence and due care

Question 17

A discretionary trust had a large amount of trust net income it needed to distribute and had recently acquired a unit trust, that had accumulated tax losses, and so the trustee of the discretionary trust sought to distribute most of the income of the discretionary trust to the unit trust. The attempted distributions of trust income were never in fact made. How is this arrangement likely to be seen by a court?

A) As a sham and therefore of no legal effect
B) As a sham and so effective for tax purposes
C) As a genuine trust arrangement that cannot be challenged
D) As serious tax evasion

Question 18

BTO Australia Ltd, an Australian resident company, has entered into an arrangement to pay its parent company, BTO Ltd, a significant global entity company resident in the Cayman Islands, a large ($100 million) fee each year for marketing and administrative services. This arrangement will have the effect of reducing BTO Australia Ltd's tax payable and also shift large profits to the Cayman Islands, a jurisdiction with a very low tax rate. What avoidance rule is this arrangement likely to be subject to?

A) Transfer pricing
B) The diverted profits tax
C) The multinational anti-avoidance laws
D) The general anti-avoidance rules

Question 19

Beatrice is considering whether to act for both the seller and buyer of the same business. If she accepts both appointments, which main attribute of the Code of Professional Conduct in the Tax Agent Services Act 2009 is Beatrice most likely to be in breach of?

A) Integrity
B) Competence and Due Care
C) Objectivity and Confidentiality
D) Honesty

Question 20

Which of the following is not one of Australia's specific anti-avoidance tax rules?

A) A non-commercial loss under Division 35 ITAA97
B) The Diverted Profits Tax Act 2017
C) The deemed dividend rules under Division 7A of ITAA36
D) The general anti-avoidance rules found in Part IVA ITAA36

Question 21

What is tax avoidance?

A) Compliance with the letter of the law
B) Compliance with the spirit of the law
C) Making a choice provided for under the Act that reduces tax payable
D) Not lodging a tax return
E) Not paying your tax bill

Question 22

What is tax planning? Select the best answer.

A) Reducing tax by making choices or elections provided for under the Act
B) Making an appointment to meet your tax advisor
C) Thinking about lodging you tax return
D) Developing a scheme to reduce tax payable
E) Saving up to pay your tax bill

Question 23

What is tax evasion?

A) Deliberately lying about your tax affairs to the tax authorities
B) Successfully reducing your tax payable
C) Failing to lodge your tax return
D) Not paying your tax bill

Question 24

Tax evasion is ?

A) Legal
B) illegal
C) Legal but not ethical
D) OK if you can get away with it

Question 25

Which of the following are indicators of tax avoidance? Select all that apply

A) Complexity and artificiality in the way in which the transaction was conducted
B) An objective purpose to reduce tax in a way not intended by the tax Acts
C) A general desire to reduce tax payable
D) Obtaining a tax reduction through a scheme

Question 26

What is required for Part IVA to apply? Select all that apply

A) A scheme
B) A tax benefit
C) A dominant purpose of obtaining a tax benefit from the scheme
D) A reduction in tax payable in some way
E) An admission from the taxpayer that they wanted to reduce their tax payable

Question 27

Which of the following are tax benefits in accordance why s 177C(1)? Select all that apply

A) Any reduction in tax payable
B) Not including income that should have been if it were not for a scheme
C) Deducing expenditure that would not be if it were not for a scheme
D) Obtaining a tax offset that would not be available if it were not for a scheme

Question 28

What is an alternate hypothesis?

A) The transaction that would reasonably have occurred or expected to occur if the scheme had not been entered into
B) The counterargument made by the taxpayer in a Part IVA case against the Commissioner
C) The alternative tax treatment for the scheme entered into
D) The other purpose that the taxpayer had in entering the scheme apart from the dominant one

Question 29

Determining a taxpayer's purpose requires a consideration of ?.

A) The subjective or intended purpose of the taxpayer
B) The factors in section 177D(2)
C) Whether a tax benefit has been obtained
D) The size of the tax benefit obtained

Question 30

What type of purpose must be present for Part IVA to apply to most schemes?

A) Dominant purpose
B) Principal purpose
C) Primary purpose
D) Subjective purpose

Question 31

If Part IVA applies, what action can Commissioner take under Part IVA for most schemes?

A) Cancel the tax benefit from the scheme
B) Void the transaction for tax purposes
C) Reconstruct the transaction to what should have happened instead
D) Prosecute the taxpayer

Question 32

Why are shams legally ineffective?

A) Legal rights and obligations that were intended did not eventuate
B) The taxpayers did not engage a lawyer to execute the transaction
C) The taxpayers do not have enough business experience to do things properly
D) Part IVA applies to them so that any tax benefits are cancelled

Question 33

How does Division 7A treat a payment to a shareholder or associate?

A) It deems the payment to be a dividend that cannot be franked
B) It cancels the payment made to the shareholder or associate
C) It forces the shareholder to repay the amount
D) It turns the payment into a loan with minimum repayments

Question 34

What type of minor is subject to division 6AA rates? Select the best answer.

A) All minors
B) Minors who are prescribed persons
C) Minors who are excepted persons
D) Minors who are prescribed persons that derive distributions from discretionary trusts

Question 35

What type of purpose is required for the Multinational avoidance rule to apply?

A) Dominant purpose
B) Principal purpose
C) Main purpose
D) Sole purpose

Question 36

What is a significant global entity? Select all that apply.

A) An entity that operates throughout most places in the world
B) Global parent entities with annual global income of $1 billion or more
C) Members of consolidated groups where one of the members is a global parent entity
D) An entity that the Commissioner deems to be a significant global entity
E) A multinational company

Question 37

What action can the Commissioner take under Part IVA when the multinational anti-avoidance rule applies?

A) Cancel the tax benefit
B) Impose a financial penalty
C) Impose a criminal penalty
D) Ban the relevant entity from operating in Australia

Question 38

What type of purpose is required for the Diverted Profits Tax rules to apply?

A) Dominant purpose
B) Principal purpose
C) Main purpose
D) Sole purpose

Question 39

What action can the Commissioner take under Part IVA when it applies to a DPT scheme?

A) Cancel the DPT tax benefit
B) Impose a financial penalty
C) Impose a criminal penalty
D) Ban the relevant entity from operating in Australia

Question 40

What is ethics concerned with?

A) Doing what is right
B) Doing what others think is right
C) Thinking in the right way
D) Always doing what you are told

Question 41

What are teleological ethical theories concerned with?

A) The consequences or the result of a person's conduct
B) The motives for conduct
C) People feeling good about their actions
D) People being able to justify their behaviour

Question 42

What is egoism?

A) An ethical theory that proposes that people should act in their own self interest
B) An ethical theory that proposes that people should act to boost their own ego
C) An ethical theory that says that people should always act rationally
D) An ethical theory that best explains taxpaying behaviour

Question 43

What is Utilitarianism?

A) An ethical theory that says that people should act in a manner that achieves the greatest good for the greatest number of people (maximise good)
B) An ethical theory that says that we ought to act to achieve maximum average good throughout society
C) An ethical theory that says that the motives behind conduct are more important than the outcome of conduct
D) An ethical theory that says that society should work out its problems together

Question 44

What are deontological ethical theories concerned with?

A) The motives behind conduct
B) The outcome from conduct
C) People feeling good about their actions
D) People being able to justify their behaviour

Question 45

How is law different from ethics? Select all that apply.

A) Law mandates certain conduct, but ethical guidance is not mandatory
B) The law prescribes penalties for noncompliance, but ethics does not
C) Laws are often enacted for a specific purpose, but ethics has no specific purpose
D) Laws are more effective in regulating behaviour
E) All of the above

Question 46

How are law and ethics similar?

A) They both attempt to regulate behaviour
B) They both mandate certain behaviours
C) They both require consultation with a professional advisor
D) They both prescribe penalties for inappropriate conduct
Short Response

Question 47

Johann recently immigrated to Australia and was advised by a financial advisor, Dodgy, Sharp & Moore, to invest in a sandalwood plantation scheme so that he can claim large upfront tax deductions. The scheme is unlikely to be successful as it involves very large management fees, non-recourse loans and the sandalwood will not produce any income for at least 7 years. How could this arrangement be described for tax purposes?

Question 48

Elle started a business selling books from a shop (the shop is leased) in July 2019. She tells you that she has had a very tough year and that her total sales for the year were only $18,000 and that with expenses of $26,000 the shop has in fact made a loss of $8,000 for the year. Elle estimates that the value of her trading stock and plant and equipment come to only $62,000 and that the market value of the building (out of which she operates the book shop) as at 30 June 2016 is $350,000. Elle also received bank interest of $20,000 and has no other income and expenses for the year ending 30 June 2020. What is Elle's likely taxable income?

Question 49

James is a qualified welder who has commenced business on 1 July 2019. James is contracted by Big Projects Pty Ltd to provide welding services for a period of 12 months on a new project. The contract requires that the work must be done by James personally but Big Projects will supply all the tools needed and James will be paid on an hourly basis of $50 per hour. James will not be liable to rectify any defects in the work, but Big Projects can terminate the contract if the work is not satisfactory. James does not have any other clients for the year ended 30 June 2020. Do the personal services income rules apply to James?

Question 50

Jack maintains a bank account in a false name and omits to include the interest from this account in his income tax return. Jill, a registered tax agent, assisted Jack to set up this account. Is there likely to be a breach of the Tax Agent Code of Professional Conduct in this scenario?

Question 51

Manni is the sole shareholder of his private company and instead of paying himself a wage for his work in the company, Manni has decided to take out a loan from the company for $100,000. If his private company had a distributable surplus of $200,000, how would this loan to Manni be treated under tax legislation?

Question 52

John and Jim Page operate a bookshop in partnership. The partners do all the work and do not employ anybody. On the advice of their accountant they settled (created) a discretionary trust with a corporate trustee and themselves and their immediate family members as beneficiaries. It was intended that the trustee would provide management services to the bookshop for a fee and the profits of this management would be distributed to the beneficiaries in accordance with their marginal tax rates. Their accountant made journal entries into the books of the partnership and the trust to effect fees for services provided and the trustees resolved to distribute all the profits to tax advantaged beneficiaries.
Comment on the effectiveness of this arrangement for tax purposes.

Question 53

Molly purchases some office furniture for sole use in her business and it has an effective life of 15 years. She makes a deliberate choice to depreciate this furniture using the diminishing value method since it provides her with a larger tax deduction, and lower taxable income, in the early years of the furniture's useful life compared the prime cost method.
Has Molly obtained a tax benefit in accordance with section 177C? Explain your reasoning.

Question 54

Wendy and Steve are the directors and shareholders of Equinox Pty Ltd, an Australian resident private company that owns and operates a grocery store as a family business. Wendy and Steve's three children attend expensive private schools and the fees are due very soon. When Steve inspects the balance of his and Wendy's joint bank account, he sees that there is very little cash available to pay for these fees, but he sees that the company's bank account has plenty of funds due to having recently received a large tax refund. With Wendy peering over his shoulder, Steve pays the school fees directly from the corporate bank account. 'It doesn't matter', he says to Wendy, 'It's our company so it is our money anyway!'.
What are the tax consequences of Steve's actions? What remedies might you recommend to negate these consequences.

Question 55

Large Ltd is a Significant Global Entity seeking to establish operations in Australia for the first time since it is a new market for the company, but it regards Australia as a relatively high taxing country, so it wants to reduce its presence in Australia. Small Pty Ltd is incorporated in Australia with Mary as the sole director and Mary and her spouse as the sole shareholders to sell products Large Ltd's products to the Australian public through on behalf of Large Ltd on commission with the remainder of the profits on each transaction being paid to Large ltd.
Would an anti-avoidance rule be useful in combating this activity? If so, briefly explain which one and how it might be useful.

Question 56

Dave is a tax advisor who has been in public practice for many years. While looking through his files of one of his clients, he discovers that he made an error in calculating a client's tax payable resulting in the client paying too much tax by $10,000. The client is not likely to notice this error and Dave is reluctant to admit he made it since he is concerned that he might appear incompetent or careless, but time is running out for the client to make an amendment to their tax return which could remedy the situation for the client. After some reflection, Dave decides to tell the client and make amends for his error by arranging for the client's tax return to be amended free of charge before time runs out.
What ethical theory or theories did Dave act in accordance with? Briefly explain. Would your answer change if Dave had no regard for the outcome of his actions and simply thought that honesty was the best policy.