Personal Tax Planning Book

Personal Tax Planning
(Over 120 Essential and Timeless Tax Planning Ideas

Applicable to Most Countries of the World)
SKANDA Kumarasingam
(Creator of the LEAST Tax Model)
© SKANDA Kumarasingam 2010 Page 1

To
Anne, Ramita and Sahana

Contents
Dedication
Introduction
About the Author
Chapter 1-Getting Started and Knowing the Terrain

Tip 1-The Essence of the Tax Planning Process
Tip 2-Areas of Personal Tax Planning
Tip 3-Common Mistakes to Avoid
Tip 4–Knowing the Events that Trigger Tax Planning Circumstances
Tip 5– Know Important Tax Reduction/Avoidance Ideas
Tip 6- Know the Foundation of Good Tax Plans
Tip 7– Know the Value of Global Analysis in Tax Planning
Tip 8– Know the Importance of Considering All Periods in Tax Planning
Tip 9– Know the Importance of Considering All Parties in Tax Planning
Tip 10– Know the Importance of Considering All Taxes in Tax Planning
Tip 11– Know the Importance of Considering All Other Costs in Tax Planning
Tip 12- Know SAVANT and Consider the LEAST Tax Model
Tip 13- Know the Strategic Implications of Tax Planning
Tip 14-Know the Value of Anticipating in Tax Planning
Tip 15- Know the Art and Science of Value Adding in Tax Planning
Tip 16- Know How and Why to Negotiate in Tax Planning
Tip 17-Transforming in Tax Planning

Chapter 2-Tax Planning with Employment Income
Tip 18 – Know Taxable Benefits and Pay Your Taxes on Them
Tip 19-Nontaxable Benefits Derived from Employment Income
Tip 20 -Deductions from Employment Income for Commissioned Sales People
Tip 21-Income from Employment and Auto (Vehicle) Based Tax Planning-Thinks to
Remember
Tip 22- Am I Having Enough Withheld (PAYE Tax)?
Tip 23- Know When and How to Pay Less in Withholding
Tip 24- The Role of Allowances in Adjusting Withholding
Tip 25-Always and on a Continuous Basis Evaluate your Circumstances Dictating the
Withholding
Tip 26- Know your Safe Minimum Payment of Withholding and Enjoy the Extra
Interest Income
Tip 27- Choose an Income Tax Filing Status that Best Suits You
Chapter 3-Help! I Can't Pay My Tax Liability

Tip 28- When in Trouble Take Action (Don’t Ignore the Issue)
Tip 29-Buy Yourself Time
Tip 30- Borrow and Have a Repayment Plan
Tip 31-Pay by Credit Card (Some Countries are not geared for this)
Tip 32- Negotiate an Installment Agreement with the Tax Department
Tip 33-Propose an Offer in Compromise
Tip 34- In Extreme Situations Declare Bankruptcy

Chapter 4-Surviving a Tax Department or Authority Audit
Tip 35- Have your Information Ready and Know the Terrain
Tip 36- Know the Triggers of an Audit
Tip 37- Types of Audits and What to Do
Tip 38- Know and Exercise Your Rights during an Audit
Tip 39- Some Crucial Things to Know and Do
Chapter 5-Tax Benefits of Home Ownership

Tip 40- The Benefits and Limits of Home Ownership
Tip 41- The Pitfalls of Improvements and Repairs
Tip 42- Knowing How to Adjust Home Purchase Costs
Tip 43- Planning the Sale of Your Home
Chapter 6-Tax Planning for Income

Tip 44- Some Ways to Reduce or Defer Your Income Tax
Tip 45- Shifting Income to Lower Tax Brackets
Tip 46-Take All Deductions Possible at the Right Time
Tip 47- The Basics of Investment Tax Planning
Tip 48-Year End Planning
Chapter 7-Tax Planning for the Self-Employed

Tip 49-Business and Self-Employment Expenses Must be Documented
Tip 50- Document Work Content and Salaries Paid to Family Members

Tip 51- Methods to Reduce Self-Employed Business Corporate Taxes
Tip 52-Understand and Comply with Your Tax Responsibilities
Tip 53- Making Your Tax Payments on Time
Tip 54- Some Methods of Reducing the Self- Employment Income
Tip 55- Choose the Best Retirement Plans with Tax Benefits
Tip 56-Tax Planning Issues with Your Retirement Savings Plans
Tip 57- Credit Proof Your Retirement Plan
Tip 58- Plan the Timing of Inflows and Outflows to Your Retirement Plans
Tip 59- Issues of Transforming Retirement Plans to Annuity
Tip 60 -Deduction of Business Expenses
Tip 61-Interest Expense Deductibility
Tip 62-Taxes and the Power of Personal Corporations
Chapter 8-Taxation of Investments

Tip 63-Differnent Types of Investment Incomes and Their Taxes
Tip 64- Value of Tax- Exempt and Tax Deferred Income
Tip 65- How to Vary the Basis of Your Investments for Maximum Tax Advantage
Tip 66- Circumstances Can Change the Tax on Capital Gains. So Use Them Advantageously
Tip 67- Match Capital Losses with Capital Gains
Tip 68- Plan your Investment Income and Expenses
Tip 69-Capital Gains or Ordinary Income
Tip 70-Ideas Related to Interest Expense Deductibility

Tip 71- If in Doubt Ask for Help
Chapter 9-Year-end Tax Planning

Tip 72-Art of Income Splitting and its Perils
Tip 73- Tax Projections
Tip 74- Adjusting the Final Withholdings Based on the Tax Projections
Tip 75- Realize that the AMT Snags everyone and Plan for it
Tip 76- Play the Timing Game
Tip 77- Giving Gifts Can be Good Tax Planning
Tip 78- Maximize Pretax Contribution to a Retirement Plan
Chapter 10-Personal Deduction Planning

Tip 79- The Game of Deduction Planning
Tip 80-Should you itemize or standardize?
Tip 81- Medical and Dental Expenses Deductions
Tip 82- Balancing the AGI to Consider the Itemized Deduction
Tip 83- Plan the Timing of Your Itemized Deductions
Tip 84-Accelerating Deductions/Postponing Income
Tip 85-Accelerating Income/Postponing Deductions
Chapter 11-Qualifying for the Home Office Deduction

Tip 86- The Advantages of a Home Office

Tip 87- Make Sure Your Home Office is according to the Definition
Tip 88- Tax Benefits of Taking Work Home
Tip 89- Deductible Expenses of Your Home Office
Tip 90- Deductions and Carry Forwards of Losses
Tip 91- Avoiding the Tax Department Scrutiny
Tip 92- Know the Perils of Tax When Selling Your Home with a Home Office
Chapter 12-Understanding Personal Tax Credits

Tip 93- Discern the Value of Tax Credits
Tip 94- Possible Tax Credits
Chapter 13-Tax Planning Tips on Auto Insurance and Long

Term Care Insurance
Tip 95-Dividends from Life-Insurance Policies
Tip 96- Vehicle Expense Deductions
Tip 97- Tax Benefit to Cover Vehicle Casualty or Theft
Tip 98- Benefits not Covered by Auto Insurance Can Also be deducted for Tax
Purposes
Tip 99- Consider the Tax Benefits of Different Long-Term Care Insurance Policies
Tip 100- Judge the Limits on the Tax Free Benefit of a Long Term Care Insurance
Policy

Chapter 14-Tax Planning in Un-Chartered Seas- Using the
Internet for Tax Leverage
Tip 101- Know and Use the Location Tax Advantage
Tip 102- Know and Use the Nature of Product to Your Tax Advantage
Tip 103- Know and Use the New Marketing Techniques to Your Tax Advantage
Tip 104- Know and Use New Types of Assets to Your Tax Advantage
Tip 105- Know and Use Remote Workforce to Your Tax Advantage
Tip 106- Making Optimal Use of the Internet May Challenge Old Rules so Use it to
Your Tax Advantage
Tip 107- Know and Use the Nature of Transactions to Your Tax Advantage
Chapter 15-International Tax Planning-Basic Techniques
Tips 108- The Hazards are high and so are the Rewards.
Tip 109- Know the Essence of International Tax Planning
Tip 110- The Method of International Tax Planning
Tip 111- Know the Tax Havens and the Risks of Them Changing
Tip 112- Finding Loopholes
Tip 113- Old and New Tricks
Tip 114- Tax Avoidance and Evasion in International Tax Planning
Tip 115- How Legitimate Plans Become Evasion (The Need for Constant Vigilance)
Tip 116- Further Techniques of International Tax Planning
Tip 117- Avoid Evasion at All Costs

Chapter 16- Tax Avoidance and Tax Evasion
Consultation Support

Introduction
This book is like a double edged knife.
It is effective and powerful in the hands of a skillful and capable tax planning
craftsman and may not be so to the uninitiated. It has been written with a wide
readership in mind such as individuals who are desirous of tax planning and those
who make decisions on behalf of a company (say as an accountant) or give advice to
companies or individuals in the capacity of a seasoned financial consultant.
Whatever your genre this book will highlight very important concepts and tips for
tax planning.
Every time the tax legislation changes you will have to read through this book as the
tips that have been provided are timeless and do not relate to a particular taxation
system (it considers many of the tax systems I have worked in and the United States
of America systems. I have considered the US system as it is the most widely
documented and oft duplicated system throughout the world) nor applicable to an
individual country or a particular year of taxation. The concepts and tips that have
been highlighted in this book should always (on a continuous basis) be considered
as taxation is probably the biggest cost of any individual or a corporation as
explained in the next paragraph.
Even though it is rarely realized taxation is most probably the biggest cost for any
organization or individual. As 75% (besides income tax, property tax, municipal or
provincial council tax, social responsibility taxes, stamp duties, high and exorbitant
import taxes, entertainment and excise taxes of their profits are taken away by the
government) and nearly 45% if you’re an individual careful planning using
legitimate methods should save the organization or the individuals’ substantial
amounts of money to improve their businesses or living standards.

This book is probably the first step towards achieving this. However if you are an
individual or business owner who does not have proper tax planning capabilities
you should always consult a good tax planning consultant because the amount you
pay to the tax planning consultant should repay you many times over, over a long
period of time. Furthermore the legislation is very complex, it requires many
payments to be made within the year and defaulting in them could lead to large
fines, penalties and even imprisonment.
So it seems that the rewards are very high from judicious tax planning. However
there is also a risk if it is undertaken by unqualified professionals or individuals
without knowledge on tax matters. This risk is almost minimized to zero levels if
carried out by a qualified tax professional such as a Chartered Accountant or a CPA.
Reading this book by those who have never considered tax planning as a way of
saving substantial amounts of money or who do not have the background in
financial planning or taxation it should provide the indication to areas where large
amounts of savings may be forthcoming. Having identified possibilities you may
then consult a qualified professional for your tax planning assignment.
Sometimes even the seasoned professional fails in providing good planning advice.
My research on more than 2000 taxpaying entities and individuals over a time
horizon of 5 years has shown that in almost 97% of the time the tax professional
hardly undertakes any tax planning whatsoever but rather is only the computational
expert who does the computation as it is and files the tax return on behalf of the
client. Even clients who have used some of the more reputed accounting firms in the
UK, Singapore and Malaysia(including global representative firms) have not been
able to realize the true value of tax planning simply because the assigned
professional from these accounting firms hardly engaged in tax planning and so
valuable saving opportunities to the clients' is lost. I believe this book can be used
by such tax planning professionals who provide consulting services to better enable
them to add value to their assignments by saving large amounts of money to their
clients.
Whether you are an individual or make decisions on behalf of a company (say as
Accountant) or give advice to companies or individuals in the capacity of financial
consultant taxation plays an important role in decision making. Decision making in
Management is defined as a part of the planning process which includes selecting
the best option amongst a given set of alternatives.
We know that individuals make certain decisions which have tax implications such
as investment decisions like buying a house or a car or motor vehicle for personal
use or sending their children to college or university. Certain highly personal
decisions such as marriage, divorce, separation, retirement planning, taking
insurances and even death (estate planning) involves decisions where tax plays a
very important role.
Consider the following scenario. Your best friend, who lives in Sydney, calls you
with the news that she has just inherited a large amount of cash. She asks for your
help in investing it in mutual funds (a form of unit-trusts) which primarily hold
bonds and shares. Assuming she can even invest it globally looks in the newspaper
or Web site which shows the current earnings of various bond funds. Pick five at
random, and calculate their average yield. Now do the same for a five which have
the words “tax exempt” in their names. (For the uninitiated, this means that these
funds invest primarily in treasury bonds issued by the government.) Interest paid
on such securities almost always is exempt from the income tax, the rate of which
ranges from 15% to 30% for most investors. What is the difference in the average
yields of the first set and the tax exempt set? Could a significant part of this
difference be accounted for by tax effects? Confusion about the taxation system can
cause the wrong yield calculation and embracing the wrong decision.
Tax planning can affect decision-making even in the most commonplace of settings.
Consider the case of a typical homeowner in a particular country which we shall call
Microasia, whose annual property tax payment (called net annual value) on her
house must be paid before April of the next year, and it is now March. Almost all
people who pay income tax calculate the tax based on their net income - that is, their
taxable revenues less their tax deductible expenses - occurring in each tax year.
Assume that the property tax is a deductible expense, and that she is in the 28% tax
bracket. (As you may know, this means that for every DOLLARS of additional
income, she would pay DOLLARS 0.28 in additional tax. Similarly, for every
DOLLARS of tax deductible expense, she would save DOLLARS 0.28 in taxes.) If she
pays the property tax in March, she gets a tax deduction on her tax return for the
current year. The tax benefit is delayed a year, however, if she waits until April to
pay. That is, simply by paying this deductible expense a few days earlier, she will
generate tax savings a year earlier. This simple bit of planning results in tax benefits
through timing, an important component of tax planning discussed in detail
throughout this book.
On the other hand we all know that decisions made by businesses can have their tax
impact. This fact is highly emphasized but is not covered in this book. My
forthcoming book titled Corporate Tax Planning will highlight how tax planning can
be undertaken by organizations. Decisions such as capital structures, (whether to
fund the company operations by debt or equity) operations planning, selecting
strategic partners with different tax clienteles, tax forecasting, internet based tax
planning, international tax planning, balance sheet tax planning and dividend policy
(or payment) are some examples of this.
Taxes are only one of the many factors which people and organizations consider
when making decisions. In some case, taxes are a dominant factor; in others, tax
considerations play a minor part. Good decision makers generally seek to manage
taxes on every transaction. It is in your hands to take action.
Skanda Kumarasingam
Sydney, Australia
1 January 2010
About the Author
Skanda Kumarasingam was a facilitator to many distinguished foreign Masters and

Bachelors programmes offered in Sri Lanka by the American Central University (USA),
American City University (USA), Troy State University (USA), University of Manipal (India),
Curtin University of Technology (Australia) and Leeds Metropolitan University (UK). He
also possesses vast primary research skills and has supervised over thirty five theses
writing for MBA programs.
He was a corporate coach specializing in finance, operations and change management

through the Centre for International Education and Training from the Torrens Valley TAFE
–South Australia and EdExcel of UK.
In the past Skanda lectured/facilitated study programs leading to the professional

examinations conducted by the Institute of Chartered Accountants of Sri Lanka, Society of
Certified Management Accountants of Sri Lanka, Association of Accounting Technicians of
Sri Lanka, Sri Lanka Institute of Marketing, Chartered Institute of Marketing (UK),
Association of Business Executives (UK) and Institute of Chartered Secretaries and
Administrators (UK).
Skanda counts over 10 years of lecture and facilitation experience. Before becoming fully
involved in education he was a senior manager and professional primarily in general
management and management accounting roles either with profit centre responsibility or
in supporting senior managers with profit responsibilities. He has held senior management
roles in KPMG (Audit and Consulting), Coke (Regional Internal Auditor and Leader-
Financial Impact Teams in the Asian Region), PepsiCo, Marks and Spenser (UK) ,
Gap(Singapore), Next (Singapore) and Ernst and Young (Business Training Centre-
Kingdom of Bahrain).

Skanda has over 15 years experience in senior management and professional
business training roles. During this period Skanda developed many tools and
techniques to aid management in managing and controlling costs and improving
profits. His models which include the Profit Maps (for profit improvement and cost
reduction) and the LEAST Tax Model (for proactive tax planning) have been widely
used in many organizations and its branches and sub-units saving them large
amounts of dollars in costs and dramatically improving profits.
Skanda is a qualified Chartered and Management Accountant. He earned his MBA

from the University of Lincoln UK. He has many professional qualifications in
Quality Management, Supply Chain Management and Taxation.
Skanda is the author of four books - The Profit Maps Model, The Profit Maps Model
Workbook, Personal Tax Planning and Economics- A Textbook. The first two books have
been used in workshops and training sessions by him with great success. These two books
and the Personal Tax Planning book have been widely distributed in e-book form and made
use by many organizations and individuals. The Economics textbook was adopted in many
teaching institutions where Skanda was a lecturer. All these books are available free for
reading (without abbreviation) in the Scribd website.
His ideas on profit improvement cost reduction can be found on his web-site
www.profitmaps.com.au. Skanda can be contacted by email on
skandak@profitmaps.com.au.
Skanda lives with his wife Anne and two daughters Ramita and Sahana in Sydney, Australia.

Chapter 1
Getting Started and Knowing the Terrain

Tip 1-The Essence of the Tax Planning Process
Global tax minimization requires the application of global tax laws and regulations
to the unique facts of each individual. Knowing the process well is essential if you
are to obtain the best benefit of saving a large portion of your income from the Tax
Department or Authority in a legitimate manner and using your tax professional
effectively. Effective tax planning requires proper execution through the following
process:
• Getting Started: The initial steps of the project are critical to the success of the
project. Critical components include identifying the members of the team,
setting parameters and guidelines for the team and establishing the first draft of
a timeline and budget for the project.
• Identifying the opportunities: Opportunities for global tax minimization
depend on many factors including the individuals or their firms industry,
geographic reach, financial and structural flexibility, risk tolerance and
resources. During the opportunity assessment phase of the project these
variables should be used to identify tax planning opportunities that are
appropriate to the individual or his or her firm if self-employed.
• Evaluating Alternatives: Once the list of opportunities is developed, the next
step for the Project Team is to evaluate each of the opportunities. The analysis
should include tax-technical, legal, financial and operational components. The
product of the analysis is a ROI analysis that can be used to select from the list of
opportunities those planning strategies that have a high probability of
implementation.
• Feasibility and Design: The feasibility and design phase of the project should
include an identification of the key tax-technical and business issues, review and
comment by the firm’s legal and accounting advisors and a list of the primary
implementation steps. As a further step, the Project Team should identify the
implications of “unwinding” the strategy if necessary. The completion of the
feasibility and design stage should result in approval for the implementation of
the tax planning strategy by the individual or appropriate officers of the firm if
self-employed.
• Implementation: Implementation of a global tax planning strategy could
require extensive involvement from many parties depending on the nature of
the project. The implementation phase should involve the preparation of an
implementation plan and should include clear communication to the impacted
parties. Implementation steps may include formation of new entities, changes in
how the Company operates its business, creation of Intercompany agreements
and pricing arrangements and transfers and assignments of employees,
contracts, assets and liabilities. The conclusion of the implementation phase of

the project is a fully implemented strategy that is documented and integrated
into the firm’s daily operations.
• Post implementation review and maintenance: Once the tax planning
strategy is implemented, the Project Team should have a plan to monitor the
global tax planning strategy to determine if the strategy is being adequately
supported and that the benefits of the strategy are being realized. Review of the
implemented strategy should become an integral part of future global tax
planning activities.
Tip 2-Areas of Personal Tax Planning
This should cover the following at least for the individual and members of the
family.
• Maximizing the use of personal annual exemptions and basic rate bands
• Capital Gains Tax planning
• Planning for retirement
• Inheritance tax reviews
• International issues and trusts
If self employed then business/company planning should also include
• Structuring your business and managing change

• Acquisitions and disposals
• Year end planning
• Optimizing tax treatment of income and expenditure
• Tax efficient withdrawal of funds
• Personal Service company planning
You may also have to consider employee issues which have tax implications such as
• Cars- personal or company ownership

• Avoiding Scale charges for fuel
• Other aspects of employee packages including shares, relocation, and
travel expenses
• Non–resident employees
• Assistance with pension planning
Tip 3-Common Mistakes to Avoid
• The biggest mistake made is waiting until too late in the year to assess your
tax obligation. Often it’s too late to take action or cash is not available to
handle the obligation

• Making a financial decision without conducting alternative tax obligation
scenarios. Buying and selling a home, business, or investment are common
examples
• Under or over withholding taxes
• Not taking full advantage of tax free and tax deferred programs
• Not keeping adequate records of deductible expenses
• Not protecting your assets from the final tax bite should you pass away
(Estate Planning)
• Overlooking charitable donations
• Using non deductible consumer debt (credit cards and auto loans) instead of
deductible, Home Equity debt instruments
• Failing to take into account changing tax brackets amounts. This is important
with the lower tax brackets available for certain capital gains
• Failing to take advantage of tax credits and all allowable deductions
Tip 4–Knowing the Events that Trigger Tax Planning Circumstances
There are a number of events that should trigger a review of your tax situation. The
following is a list of the most common. Seek advice and run alternative tax scenarios
prior to deciding the best approach for your situation when:
• You borrow money

• You decide to pay off a loan
• You are planning for retirement
• You buy or sell stock (shares) and mutual funds
• You consider adding to or withdrawing from a tax deferred savings program
• You are retiring
• You are getting married or divorced
• You buy or sell your home
• You want to make a large gift to a child or relative
• You are considering a move (change of location)
• You are considering starting, buying or selling a business
• You are incurring business expenses as an employee
• You are buying or selling business equipment
• You are holding an uncollectible note
• You are considering a large charitable gift
• You are buying or selling any kind of property
• You incur or expect to incur large medical expenses
• Your employer offers you a lump sum payment of your pension versus an
annuity
• You incur or expect to incur large education expenses

Tip 5– Know Important Tax Reduction/Avoidance Ideas
To benefit the most from tax planning and avoid the common mistakes mentioned
earlier, develop a tax strategy for your situation. The strategy should incorporate
the following planning principles:
1. When is the best time to complete a transaction that impacts your tax
situation?
2. How do you reduce your overall tax burden? What options are available?
3. Defer any tax obligation, penalty free for as long as possible
4. Match high income with high expenses whenever possible
5. Consider your marginal tax bracket when making decisions. The next dollar
you earn could be taxed from 10% to over 35%
Some common tax planning and tax avoidance ideas are:
• Invest fully in tax deferred programs

• Explore all the retirement plan programs
• Take full advantage of the interest deductibility of your home mortgage and
home equity loans versus credit card debt or other loans
• Look into Annuities for their tax benefits
• Explore using tax deferred cash value life insurance
• If you have a casualty loss, shift income to the same year to maximize the
available writes off
• Buy tax-free treasury bills, bonds and bond funds
• If you own a home, consider making an additional payment to shift interest
expense into a high income tax year
• Begin planning for retirement early. Conduct income forecasts and
continually rebalance your estate to reduce taxes
• Take advantage of the expense option for depreciable assets of your business
• Consider gifts to minors and beneficiaries over time to reduce investment
income and future estate taxes
• Consider business use of your home to capture business expense deductions
• Plan other capital acquisitions and sales to offset gains with losses and to
capitalize on lower long-term capital gains tax rates
• Consider like-kind exchanges to reduce capital gains tax exposure. If you
intend to buy replacement property you can effectively defer a taxable gain
into the future with a like-kind exchange
• Take advantage of the capital gain exclusion
• Advantage of low taxation on WHT

Tip 6- Know the Foundation of Good Tax Plans
• Base the tax plan on sound legal authority. Usually the Primary authority
plays the vital role who may be the Commissioner General of the Inland
Revenue or his designated representatives. Pay attention to the rank and
permanence of the authority. Please note that as the level of authority
decreases, the level of risk increases.
• Do not carry a good plan too far. Tax plans tend to multiply geometrically
so “do not put too many feathers on the dog”. Restrain the natural
enthusiasm in favor of realism. Keep it simple and remember you have to
explain it if the need arises. Also complex plans tend to attract attention as
many have used complication and smoke screen effects to pull the wool
over the eyes of the tax authorities and failed.
• Make it flexible. The plan should be adaptable to changing conditions, to the

changing fortunes of the taxpayer and from internal and external forces.
• Integrate the tax plan with other factors in making decisions. The plan
should fit within the proper position with other business variables as tax is
only one business cost. Also keep in mind other forms of taxes that could be
saved as income tax may not be the only tax involved. Keep the overall
business objective in mind.
• Find out if a similar plan has been unsuccessful. This is evidenced by court
cases and rulings. Avoid needless duplication and assess risks.
• Consider the “Maximum Exposure”. What if the plan fails? The law changes?
Risk calculable should be assessed along with the net costs or tax savings.
Risk incalculable includes uncertainty, stress, and other psychological
factors.
• Consider the effect of timing. Use present value methods but remember all
of the assumptions that go into present value computations(the discount
rate to use ,IRR, future actions and what time period to consider)
• Shape the plan to the tax payers’ needs which may include tax location of
the taxpayer and where he wants to go. The consultant’s objective is to
understand and craft a plan to ensure the most economical way to get
there.

Tip 7– Know the Value of Global Analysis in Tax Planning
Consider all of these in any proposed transaction to consider the tax implication:
• All periods- How taxes are affected at each point in time
• All parties- The tax attributes of each party to the transaction
• All taxes- Consider both explicit and implicit taxes
• All other costs- Tax minimization might require the assumption of non-tax
costs
Tip 8– Know the Importance of Considering All Periods in Tax Planning
• Transactions often have tax effects spanning many years. It is important to

consider the effects in all years.
• This often requires speculation regarding what the tax system will look like
in future years.
• Present value is a critical concept when comparing tax savings today from
one transaction with tax savings in the future from another.
• E.g., you can sell stock today, realize a gain, and reinvest in a pension, or wait
until you retire to sell the stock.
Tip 9– Know the Importance of Considering All Parties in Tax Planning
• Most transactions (which have tax implications) involve at least two parties.
• Good tax planning involves the minimization of total taxes paid by all parties.
• You should be willing to structure a transaction in a way that costs you
DOLLARS 1,000 in extra taxes if it saves the other person DOLLARS 2,000 in
taxes. This is good for both of you if you adjust the price DOLLARS 1,500 in
your favor. After taxes, both of you are head by DOLLARS 500.
• E.g., you can buy a machine for your business or lease it. The key difference
tax wise is who can depreciate it. If you are paying AMT, depreciation is less
valuable to you, so lease.
Tip 10– Know the Importance of Considering All Taxes in Tax Planning
• You must consider taxes besides income tax. Many transactions differ in their
effects on provincial council or state income taxes, property taxes, transfer
(estate and gift) taxes, and foreign income taxes. e.g., a company needs
money. It can borrow through its U.S. parent or its German subsidiary.

• An important “tax” is implicit tax. Implicit tax is the extra price (lower
return) you must pay to acquire tax favored assets. This is a cost imposed of
you in lieu of explicit tax. e.g., AAA rated corporate bonds pay 6%, while AAA
rated municipal bonds pay 4%. The 2% lower return is an implicit tax on
treasury bills or bonds.
Tip 11– Know the Importance of Considering All Other Costs in Tax Planning
• It is often the case that tax advantaged transactions have undesirable

consequences. These must be factored into the analysis.
• The objective is not to minimize taxes, but to maximize wealth (or more
generally, the economic concept of “utility”).
• E.g., having children provides several tax benefits, but children cost more to
raise than the tax savings.
Tip 12- Know SAVANT and Consider the LEAST Tax Model
Any good tax plan should consider the following to take a holistic view of the
situation. This is a very powerful acronym used for tax planning.
• Strategic- Only consider tax plans that are consistent with overall economic
strategy.
• Anticipated- Forecast future tax conditions.
• Value Adding- The objective is to maximize the present value of after-tax
profit.
• Negotiated- Maximize total tax benefit and spread the gain across all parties.
• Transforming- Convert unfavorably taxed items into favorably taxed items.
Note- An even more powerful model than the above called the LEAST Tax model has
been developed, tested and used in global companies by the author. However this
model is proprietary and used with specially developed diagnostic software and
tools and hence details are not disclosed here. In almost all cases the model
identified over 40% savings from client’s current tax bill over a time horizon of 5
years. That is on average a 40% savings X 5 years is achieved which is equal to
200% of the current tax bill. For information regarding the use of this model see the
consultation support page.
Tip 13- Know the Strategic Implications of Tax Planning
• Overall economic strategy is generally independent of tax considerations.

Strategy provides focus, limiting the set of options we need to consider.

• It is important to know that the tax “tail” should not wag the strategy “dog.”
Ask yourself, what you want to accomplish, and then consider how tax
planning can help. E.g., your strategy might be to financially prepare for a
secure retirement at age 55. You could then consider tax advantaged saving
and investment tools to achieve that goal.
Tip 14-Know the Value of Anticipating in Tax Planning
• When a transaction affects future years, both current and future tax
conditions are relevant.
• Tax conditions change for two reasons which are tax law revisions and when
the tax situation changes (e.g. paying AMT).
• Tax law changes can have direct and indirect effects (implicit taxes). E.g., a
cut in tax rates should cause municipal bond prices to fall.
• We can deal with an uncertain future by forecasting tax changes, and
providing contract flexibility (escape hatches).
Tip 15- Know the Art and Science of Value Adding in Tax Planning
• This is the cold arithmetic of tax planning. We should strive to maximize

value and not minimize taxes.
• The objective is to maximize the present value of after-tax economic income
(or cash flow).
• Tax deferral is usually valuable due to the time value of money considering
the financial importance of the present value calculation. Present value-
Cash today is more useful than cash in the future. Thus, when comparing
transactions which provide (or cost) you cash at different points in time,
these cash flows must be adjusted to a comparable basis. This is done by
converting any future cash flow to its present value.
• Tradeoffs must often be made between tax and non-tax considerations, such
as risk sharing, information asymmetry, and frictions and transaction costs.
Tip 16- Know How and Why to Negotiate in Tax Planning
• Generally seek to maximize the total tax benefits of all parties to the
transaction.
• Share the tax benefits with the other parties. This involves careful
negotiation of prices to ensure that all parties are happy.
• Choose counter-parties wisely. Those with different tax attributes from you
offer the best tax planning prospects. (Tax clienteles). e.g., you are paying
AMT and want to lease a machine rather than buy it, so that the leaser can

use the depreciation. The ideal leaser does not pay AMT and is in a high tax
bracket. Such a person could offer the best lease terms.
Tip 17-Transforming in Tax Planning
If possible, adjust transactions to convert unfavorably taxed items into favorably

taxed items as shown below
• Taxable income to Tax-free income
• Ordinary income to Capital gains (low rate)
• Current income to Future income
• Non-deductible expense to Deductible expense
• Capital or passive loss to Ordinary loss
Transformation examples
Taxable income to tax-free income:
• selling corporate bonds and buying municipal bonds
• donating appreciated property to charity
Ordinary income to capital gains:
• selling corporate bonds and buying stock
• selling an asset before it realizes income
Current income to future income:

• borrowing money instead of selling stock
• delaying payments received by a cash basis seller
Nondeductible expense to deduction:

• rationalizing a valid business purpose to a consumption activity
• using home equity loans to buy consumer durables rather than securing
loans with the durables
Capital loss to ordinary loss:

• create capital gains from ordinary income
Passive loss to ordinary loss:

• borrow money to invest in a profitable passive activity (e.g., real estate)

Chapter 2
Tax Planning with Employment Income

Tip 18 – Know Taxable Benefits and Pay Your Taxes on Them
Taxable benefits derived from employment income include those given below and
you should pay all your dues on them on time. Under no circumstances should you
end up with tax- evasion (willful non-payment of your legal due)
• The value of most benefits derived from employment is included in personal

income. For instance employees who are rewarded near cash merchandise
such as gift certificate must take their fair market value of that award into
account as taxable income
• The value of the discount on university tuition fees offered by an employer or

to their spouses or children would normally be considered employment
income and therefore represent a taxable benefit to employees
• Employers or its employees who receive periodic payments under the

disability insurance plan, sickness or accident insurance plan or income
maintenance insurance plan to compensate for loss of income from an office
or employment must include that amount in income if the plans premiums
are paid for by the employer. However they may deduct from income the
amount they may have personally contributed towards such a plan.
• Employees who exercise an option to purchase an automobile from their

employer at less than their fair market value are considered to have received
a taxable benefit for the difference between the price paid and the fair
market value.
• Flexible employee benefit programs which allow employees to custom design

their own package of health and other benefits are now very popular in the
workplace. Take care when structuring such plans however because taxable
benefits can result. If for example an employee accumulates taxable credits
and those benefits are received in cash that amount is generally considered
taxable income.
Tip 19-Nontaxable Benefits Derived from Employment Income
Although most benefits derived from employment must be included in personal

income there are some exceptions. They include employers’ contributions to private
health service plans, group sickness or accident plans, registered pension plans, and

deferred profit sharing plans. Think how you can transform them into nontaxable
benefits so that the take pie is made bigger for you. This is usually a powerful
planning tip for any business executive when negotiating their pay-and benefits
package with their employers or potential employers
The examples of non taxable benefits include but are not limited to
• Ordinary discounts on the employer's merchandise available to all

employees on an indiscriminative basis
• Subsidized meals available to all employees provided a reasonable charge is

made to cover direct costs
• The cost for distinctive uniforms, protective clothing or footwear required to

be worn during employment including related laundry expenses
• Reimbursement of moving expenses upon relocation
• Receipt of up to a limited number of noncash gifts such as for Christmas

wedding or birthday in one year. If you receive more than two noncash gifts
or awards from your employer select those with an aggregate cost closest to
the maximum limit that is allowed by the law.
• Non-cash awards for meeting or exceeding targets. Again there may be a

limit on the number of gifts that can be given or the maximum amount that is
applicable.
• Use of employers’ recreations facilities or employer sponsored membership

in a social club where such membership is considered beneficial to the
employer.
• Mobile phones used for business purposes
• An employer mandated medical examination required as a condition of

employment
• Employer sponsored personal counseling services in respect of mental or

physical health upon layoff from employment or retirement
• Employer sponsored travel to where the trip was undertaken predominantly

to business reasons
• Tuition and related fees if the course is required for employment and is
primarily for the employers' benefit

• A reasonable per kilometer or automobile allowance (named as
reimbursement)
• Board and lodging and transportation to special work sites where the
employee is required to be a reasonable distance away from their principal
residence
• A reasonable employer provided allowance for an employee's child to leave

the current school and attend the nearest suitable school if one is not close to
where the parents must reside for employment purposes
• Employer paid expenses for moving an employee and his family along with
household effects out of a remote location upon the termination of
employment
• Employers provided computer and internet service if employee requires

such a service to carry out their business obligations. However it is used for
personal the reasons it would result in a taxable benefit
• Home office if required essentially by the employer to work from home. A

part of the salary can be structured to state it is only a reimbursement of rent
expenses. Documentation is essential.
• If you use air miles earned from an incentive program for personal use you
will be deemed to have received a taxable benefit if those points were earned
as a result of expenditures paid for by your employer. To avoid that situation
you should be careful to use such air miles strictly for business purposes on
behalf of your employer.
Tip 20 -Deductions from Employment Income for Commissioned Sales People
Commissioned salespeople if required by contract to pay their own expenses may be

able to deduct those expenses against commission income. If your expenses exceed
commission related income there may be alternative methods of making claims
available to you.
If you are a commissioned employee consider leasing rather than purchasing capital
equipment such as a computer where capital allowance is not allowed
Commissioned sales employees who work in their homes should ensure that a
separate business telephone line exists in order for regular phone expenses other
than business long distance charges to be deductible

Tip 21-Income from Employment and Auto (Vehicle) Based Tax Planning-
Thinks to Remember
• Keep a record to support business mileage
• Travel between your home and employers' office is generally considered to

constitute personal rather than business use of the automobile. If however
you are required to make a business stop between your home and office at
the request of your employer the entire distance traveled throughout the day
may constitute business rather than personal use.
• Employer subsidized parking must be included in income if the benefit is

being provided primarily to the employee. However if the parking spot is also
provided for the benefit of the employer to enable the employee to use his
automobile in the course of carrying on business related duties during office
hours or is required to work late hours a portion of this amount might be
reduced or waived off.
• If you have an arrangement with your employer that involves a combination

of both a flat rate and a per kilometer travel allowance for the same vehicle
the tax treatment might be complex particularly if some automobile expenses
also reimbursed. Your accountant should be able to assist in this process
Tip 22- Am I Having Enough Withheld (PAYE Tax)?
If you fail to estimate your income tax properly, it may cost you in a variety of ways.
If you receive an income tax refund, it essentially means that you provided the Tax
Department or Authority with an interest-free loan during the year. By comparison,
if you owe taxes when you file your return, you may have to scramble for cash at tax
time--and possibly owe interest and penalties to the Department as well.
For instance if you are an employee who is making regular retirement contributions
request that the amount of income tax withheld on your paycheck be reduced in
order to reflect the saving those conditions will bring. This is a more efficient way to
manage your money than paying tax upfront and then waiting for the refund the
following year.
When determining the correct withholding amount (PAYE) for your salary or wages,
your objective should be to have just enough taxes withheld to prevent you from
incurring penalties when your tax return is due. (You may owe some money at the
time you file your return, but it shouldn't be much.) You can accomplish this by
reading and understanding Tax Department or Authority Publications and properly
completing the required forms (and accompanying worksheets), and providing an

updated information sheet to your employer when your circumstances change
significantly.
Tip 23- Know When and How to Pay Less in Withholding
Two factors determine the amount of income tax that your employer withholds
from your regular pay: the amount you earn and the information you provide to
them about your special tax circumstances like having a housing loan or other tax
losses that may be deductible from your employment income which of course has
the Tax Department or Authority’s approval and blessings. Get the Tax Department
or Authority approval for a reduced tax withholding on your employment income in
the specified forms and submit it to your employer. Even consider if you have any
brought forward tax losses.
Tip 24- The Role of Allowances in Adjusting Withholding
You must understand allowances. Think of allowances as cash in your pocket at the
time that you receive your paycheck. The more allowances you claim, the less taxes
are taken from your paycheck (and the more cash ends up in your pocket on
payday). For example, you can maximize the amount withheld from your paycheck
to ensure that you have enough tax withheld to cover your tax liability by claiming
zero allowances. This will reduce the amount of cash you take home in your
paycheck. The following factors determine your number of allowances:
• The number of personal and dependency exemptions that you claim on your
income tax return
• The number of jobs that you work
• The deductions, adjustments to income, and credits that you expect to take
during the year
• Your filing status
• Whether your spouse works
• Childs income
Tip 25-Always and on a Continuous Basis Evaluate your Circumstances

Dictating the Withholding
The law requires your employer to let you change your allowances at any time. You
do this by submitting a required form usually styled and issued by the Tax
Department or Authority to your employer. Changes in your personal life, as well as
changes in the tax law, may result in your having too little or too much tax withheld
from your paycheck. If you get married, buy a home, have a baby, or experience any
other major financial life change, consider re-evaluating your withholding. And in
some cases, such as divorce, you may be required to submit a new form.

Tip 26- Know your Safe Minimum Payment of Withholding and Enjoy the Extra
Interest Income
If you accurately complete all worksheets and don't have significant non-wage
income (e.g., interest and dividends), it's likely that your employer will withhold an
amount close to the tax you owe on your return. In the following cases, though,
accurate completion of the worksheets alone won't guarantee that you'll have the
correct amount of tax withheld:
• When you are married and both spouses work

• When you are working in more than one job
• When you have significant nonwage income, such as interest, dividends,
alimony, unemployment compensation, or self-employment income
• When you'll owe other taxes on your return, such as self-employment tax or
household employment tax
In these cases, the Tax Department or Authority Publications or advice from the Tax
Payers Assistance Unit can help you compare the total tax that you'll withhold for
the year with the tax that you expect to owe on your return. It can also help you
determine any additional amount you may need to withhold from each paycheck to
avoid owing taxes when you file your return. Alternatively, it may help you identify
if you're having too much tax withheld.
Remember in many countries that as far as you pay your quarterly taxes to be in par
with last year’s actual tax liability divided by four (to arrive at the quarterly liability)
then you will not be fined provided the shortfall is paid subsequently on or before
the due date.
If you predict a higher tax payment you may pay the safe minimum suggested above.
However if you predict a loss or reduced tax in the current year consult your tax
professional on advice as to how much to pay so that you do not give the Tax
Department or Authority an interest free loan. Keep the extra money in the Bank
and you enjoy the interest income.
Tip 27- Choose an Income Tax Filing Status that Best Suits You
Selecting a filing status is one of the decisions you'll make when you fill out your
income tax return, so it's important to know the rules. And because you may have
more than one option, you need to know the advantages and disadvantages of each.
Making the right decision about your filing status can save money and prevent
problems with the Tax Department or Authority down the road.

Your filing status is especially important because it determines, in part, the tax rate
applied to your taxable income, the amount of your standard deduction, and the
types of deductions and credits available. By choosing the right filing status, you can
minimize your taxes.
Some country legislations will only have a single filing status (like in Malaysia and
Australia) whilst others may have several. Also the number and features could
change from one year to another. For example the usual tax filing statuses found are
• Single
• Married filing jointly
• Married filing separately
• Head of household
• Qualifying widow/er with dependent child.
There are various income tax brackets. Your tax rate depends on your filing status
and the amount of your taxable income. So, it's clear that some filing statuses are
more beneficial than others.
Although you'll generally want to choose whichever filing status minimizes your
taxes, other considerations (such as a pending divorce) may also come into play.
• You're single if you're unmarried or legally separated from your spouse on the last
day of the year -This one's pretty straightforward. Depending on your
circumstances, it may be your only option. Your filing status is determined as
of the last day of the tax year .To use the single status, you must be
unmarried or separated from your spouse by either divorce or a written
separate maintenance decree on the last day of the year. Unfortunately, you
jump into a higher tax bracket more quickly with the single status than with
some of the other filing statuses.
• Married filing jointly often results in tax savings for married couples -You may file
jointly if, on the last day of the tax year, you are
1. Married and living together as husband and wife

2. Married and living apart, but not legally separated under a divorce
decree or separate maintenance agreement, or
3. Separated under an interlocutory (i.e., not final) decree of divorce
Also, you are considered married for the entire tax year for filing status
purposes if your spouse died during the tax year.
When filing jointly, you and your spouse combine your income, exemptions,
deductions, and credits. Filing jointly generally offers the most tax savings for
married couples. For one thing, there are many credits that you can take if

you file a joint return that you can't take if you file married filing separately.
These may include like in many countries the child and dependent care
credit, the adoption expense credit, and the Lifetime Learning credit.
Still, this filing status is not always the most advantageous. If your spouse
owes certain debts (including defaulted loans and unpaid child support), the
Tax Department or Authority may divert any refund due on your joint tax
return to the appropriate agency. To get your share of the refund, you'll have
to file an injured spouse claim and probably have to jump through hoops. You
can avoid the hassle by filing a separate return.
• You don't have to be separated to choose married filing separately -You and your
spouse can choose to file separately if you're married as of the last day of the
tax year. Here, you'd report only your own income and claim only your own
deductions and credits. Filing separately may be wise if you want to be
responsible only for your own tax. With a joint return, by comparison, each
spouse is jointly and individually liable for the full amount of the tax due. So,
if your spouse skips town, you'd be left holding the tax bag unless you
qualified as an innocent spouse.
Filing separately might also be the best tax move if one spouse has significant
medical expenses or miscellaneous itemized deductions. Your ability to take
these deductions is tied in to the level of your adjusted gross income or
assessable income. For example, certain expenses are deductible only if they
exceed a given percent of adjusted gross income or assessable income or
maximum limited to the amount of assessable income. By filing separately or
jointly the assessable income for each spouse is varied.
Remember, though, that you won't qualify for certain credits (such as the
child and dependent care tax credit) and can't take certain deductions if you
file separately. For example, you cannot deduct qualified education loan
interest if you're married, unless you file a joint return.
• Head of household status offers certain income tax advantages -Those who
qualify for the head of household filing status get special tax treatment. Not
only are the tax rates lower for head of household filers than for single filers
and married filing separately filers, but the standard deduction is larger as
well. However, you'll have to satisfy the following requirements:
1. Generally, you should be unmarried at the end of the year (unless

you live apart from your spouse and meet certain tests)
2. You must maintain a household for your child, dependent parent,
or other qualifying dependent relative
3. The household must be your home and generally must also be the
main home of a qualifying relative for more than half of the year

4. You must provide more than half the cost of maintaining the
household
5. You must be a citizen or resident alien for the entire tax year in the
country of legislation.
• Qualifying widow/er with dependent child offers the advantages of a joint return -
You may be able to select the qualifying widow/er with dependent child
filing status if your spouse died recently. This status allows you to use joint
tax rates and offers the highest possible standard deduction, the one
applicable to joint tax returns. To qualify, you must satisfy all of the following
conditions:
1. Your spouse died either last tax year or the tax year before that
2. You qualified to file a joint return with your spouse for the year he
or she died
3. You have not remarried before the end of the tax year
4. You have a qualifying dependent child
5. You provide over half the cost of keeping up a home for yourself
and your qualifying child
As you can see, choosing the correct filing status is not always easy. You
might want to speak with a professional tax preparer or consult the Tax
Department or Authority Publications for more information

Chapter 3
Help! I Can't Pay My Tax Liability

Tip 28- When in Trouble Take Action (Don’t Ignore the Issue)
You're almost done with your income tax return, and you're already thinking of
ways to spend your refund. Then, the unthinkable happens--instead of a refund, you
find that you owe a large amount of money to the Tax Department or Authority. Or
perhaps you've just received a notice in the mail claiming that you owe a certain
amount of money for an incorrect deduction you took two years ago which reduced
your tax liability then. You thought it was tax free at the time. Whatever the reason,
you're now in the unenviable position of owing money to the Tax Department or
Authority-and you don't have the cash. What do you do now?
Don't panic. You have several options. That said; however, don't put your head in
the sand. The Tax Department won't go away, and the amount you owe will only
grow larger if you procrastinate. If you ignore your tax bill entirely, not only will
interest and penalties accrue, but the Tax Department or Authority may go after
your assets and wages as well. You can avoid all of that unpleasantness by finding a
way to pay your taxes. Here are some possibilities.
Tip 29-Buy Yourself Time
Perhaps you're between paychecks right now, or maybe you just paid a substantial
car repair bill. For one reason or another, you're suffering from a short-term cash
flow problem. You'll eventually have the cash to pay your tax bill-you just don't have
it right now. If that's your situation, you may want to consider the following
approach. Pay as much as you can when you file your tax return. This will help
reduce the penalties and interest that you'll be charged.
Next, wait for the Tax Department or authority to send you a bill for the remaining
balance. This should take roughly 45 days in an efficiently tax administered country
or late as 90 days if otherwise. Perhaps by then you'll have enough cash to pay the
bill in full. If not, pay as much of this bill as you can (again, reducing penalties and
interest), and wait. In another 45 days (only approximate), you'll get another bill. As
you can see, it takes a while for the Tax Department or Authority to get serious. So,
by following this process, you can buy yourself some time.
One problem with this approach, however, is that interest and penalties continue to
accrue on the unpaid balance. So, while you may buy yourself some time, the total
amount that you'll end up paying may be much higher than it would have been if
you had paid your tax bill in full when due.

There's another thing to keep in mind-filing an extension will do you no good. An
extension simply extends the time to file your tax return; it doesn't extend the time
to pay your tax. Whatever you do, file your return on time. A timely filed return can
reduce your subsequent penalties and has time-bar implications on the tax audit.
Tip 30- Borrow and Have a Repayment Plan
One of the easiest ways to pay your tax bill may be to borrow the money from a
relative or close friend. Borrow whatever you must to pay the bill in full, and draw
up a payment plan to reimburse your benefactor. By paying the bill in full, you'll be
able to avoid Tax Department or Authority penalties and interest. And you may not
have to pay interest to your relative or friend. However, be careful if you borrow
below-market interest rates as rules may trigger certain tax consequences.
If you can't borrow from a relative or friend, consider taking out an unsecured bank
loan or tapping into a home equity line of credit. Although the interest rates may be
higher than interest that a relative or friend may charge, the interest will probably
be less than the interest and penalties owed on the unpaid tax. Find the financial
implications before doing this with the support of your tax professional.
Tip 31-Pay by Credit Card (Some Countries are not geared for this)
Another option is to pay your taxes by credit card provided the Tax Department or
Authority is geared to handle this. Obviously, you'll want to use the card with the
lowest interest rate. If you're approaching your credit limit on a given card, you can
split payments between two different credit cards. Contact the Tax Department or
Authority to find out which credit cards are accepted.
Paying by credit card allows you to pay your tax bill on time. You'll avoid both
penalties and interest for late payment of taxes. However, the interest rate that your
credit card company charges may be higher than what the Tax Department or
Authority charges on installment payments or late payments.
Tip 32- Negotiate an Installment Agreement with the Tax Department
An installment agreement is a monthly payment plan with the Tax Department or

Authority. It's the most widely used method for paying a Tax Department or
Authority tax debt. The tax Department or Authority is required to accept the
payment of your tax liability in installments if your total tax liability (not counting
interest, penalties, and other additions) is within an acceptable limit and if you meet
a few other requirements.
Your tax liability may be spread out over three years, and payments can be
automatically withdrawn from your bank account or made through payroll
deduction. You'll generally be expected to pay the maximum installment amount
that you can afford. Although you won't avoid interest and penalties with this
payment method, you'll avoid more severe collection action.
Tip 33-Propose an Offer in Compromise
If you meet certain criteria, such as doubt as to liability or doubt as to collectibility,

you may want to propose an offer in compromise to the Tax Department or
Authority. This is a negotiated settlement between you and the Tax Department or
Authority. Here, the Tax Department or Authority may agree to accept a lesser
figure from you in full satisfaction of your tax debt. For example, if you owe
DOLLARS 20,000 in taxes, you may be able to settle for DOLLARS 5,000. However,
there's no guarantee that the Tax Department will accept your offer. There's also a
lot of paperwork to submit, including various forms, financial statements, pay stubs,
and bank records.
If you feel overwhelmed by the amount of your tax bill, though, and if you meet the
criteria, an offer in compromise may be a good solution. Along with lowering your
tax liability dramatically, an offer in compromise can help you avoid severe
collection actions. However you cannot play this card every year.
Tip 34- In Extreme Situations Declare Bankruptcy
Bankruptcy is a way to resolve your debts when you're unable to pay them.
Although many taxes can't be avoided in bankruptcy, declaring bankruptcy will
suspend most collection activities by the Tax Department or Authority. In some
cases, interest and penalties will also cease to accrue. Finally, reducing your overall
debt burden by eliminating unsecured debt (e.g., credit card balances) through
bankruptcy can leave more money to pay your tax bill.

Chapter 4
Surviving an Tax Department or Authority Audit

Tip 35- Have your Information Ready and Know the Terrain
Even the most honest of taxpayers can be left trembling at the thought of a Tax
Department or Authority audit. Let's face it-it's right up there with public speaking.
To survive an audit, you've got to arm yourself with information. You should
understand what the audit process is all about, why your return was audited, what
your rights and responsibilities are, and how you can appeal the findings.
A Tax Department or Authority audit is an impartial review of your tax return to

determine its accuracy-it's not an accusation of wrongdoing. However, you must
demonstrate to the Tax Department or Authority that you reported all of your
income and were entitled to any credits, deductions, and exemptions in question.
The Tax Department or Authority must complete an audit within the stipulated time
from when the tax return is filed, unless tax fraud or a substantial underreporting of
income is involved or suspected.
Tip 36- Know the Triggers of an Audit
Several factors can lead the Tax Department or Authority to single out your return
for an audit. For instance, taxpayers who are self-employed receive much of their
income in tips, or run cash-intensive businesses face a greater likelihood of audits.
The Tax Department or Authority also pays more attention to professionals such as
doctors, lawyers, and accountants (who often run their own businesses and do their
own bookkeeping). In addition, if you’re itemized deductions in several major
categories-medical and dental expenses, taxes, charitable contributions, and
miscellaneous-are greater than average, you'll have an increased chance of being
audited. Other red flags may include:
1. A return that is missing required schedules

2. A return signed by a preparer associated with problems in the past
3. A return signed by a preparer who is unqualified to do it
4. A return reporting income above a particular limit
5. A return showing a substantial reduction in tax due to changed tax status
Make sure the red flags mentioned above are avoided as far as possible.
Tip 37- Types of Audits and What to Do
If you are to be audited, the Tax Department or Authority will inform you by letter.
There are three types of audits:
• A correspondence audit: This is for minor mistakes and requires only that
you mail certain information to the Tax Department or Authority. For
example, maybe you forgot to attach a schedule to your income tax return.
The matter will be closed if the tax department or authority is satisfied with
your paperwork.
• An office audit: Here, you'd typically bring your tax-related records to a Tax
Department or Authority office for examination. For example, if you claimed
an unusually high deduction for medical expenses, the tax department or
authority may want to see your medical bills and canceled checks, among
other things.
• A field audit: Here, the auditor generally visits your home or business to
verify the accuracy of your tax return. It may be possible for the auditor to
visit the office of your representative, instead.
Tip 38- Know and Exercise Your Rights during an Audit
You have several rights when you're involved in an audit. These include:
• The right to an explanation of the audit process

• The right to representation by an attorney, Chartered Accountant or
Certified Public Accountants or an agent appointable under the tax
legislation
• The right to claim additional deductions that you didn't originally claim
on your tax return
• The right to request an opinion from the Tax Department or Authority's
national office on specific technical issues that arise during the audit
• Follow the legislation of the country to seek redress.
Tip 39- Some Crucial Things to Know and Do
Consider the following when you are audited:
• Request a postponement (whenever you need it) to gather your records

and put them in order
• Be sure to read the Tax Department or Authority Publications which
outline Taxpayers' Rights before your audit
• Before your initial interview with the tax department or authority agent,
meet with your representative (if any) to discuss strategies and expected
results
• Bring to the audit only the documents that are requested in the tax
department or authority notice

• Be thoroughly prepared--if your records clearly substantiate the items
claimed on your return, the agent won't waste time conducting a more in-
depth audit
• Be professional and courteous (and expect the same treatment in return)
• Do not volunteer information to the tax department or authority agent; if
you have a representative, he or she should respond to the agent's
questions
• Don't lie
• Keep detailed records of any materials that you submit to the agent and of
any questions asked by the agent
• Ask to speak to the auditor's supervisor if you think that the agent is
treating you unfairly
• When you get the examination report, call the auditor if you don't
understand or agree with it
• If you don't agree about the tax liability, meet to see if a compromise can
be reached
You can either agree or disagree with the auditor's findings. If you agree, you'll
complete some paperwork and pay what's owed. If you disagree with the auditor,
the issues in question can be reviewed informally with the auditor's supervisor. Or,
you can appeal to the Tax Department or Authority. Follow the legislation of the
country to seek redress.

Chapter 5
Tax Benefits of Home Ownership

Tip 40- The Benefits and Limits of Home Ownership
In tax lingo, your principal residence is the place where you legally reside. It's
typically the place where you spend most of your time, but several other factors are
also relevant in determining your principal residence. Many of the tax benefits
associated with home ownership apply mainly to your principal residence-different
rules apply to second homes and investment properties. Here's what you need to
know to make owning a home really pay off at tax time.
One of the most important tax advantages of home ownership is the deduction of
mortgage interest. If you itemize deductions on the schedule of your income tax
return, you can generally deduct the qualified residence interest that you pay on
certain home mortgages taken on your principal residence. (This also applies to
second homes.) That is, you may be able to deduct the interest you've paid on a
mortgage to buy, build, or improve your home, provided that the loan is secured by
your home. Your ability to deduct interest depends on several factors.
Up to a certain limit of acquisition mortgage debt qualifies for interest deduction. If

your mortgage loan exceeds this limit some of the interest that you pay on the loan
will not be deductible.
Although this deduction also applies to certain home equity loans secured by your
home, the rules are different. Home equity debt involves a loan secured by your
main or second home that exceeds the outstanding mortgages on the property.
The interest that you pay on a qualifying home equity loan is generally deductible
regardless of how you use the loan proceeds.
Tip 41- The Pitfalls of Improvements and Repairs
Home improvements and repairs are generally nondeductible. Improvements,

though, can increase the tax basis of your home (which in turn can lower your tax
bite when you sell your home). Improvements add value to your home, prolong its
life, or adapt it to a new use. For example, the installation of a deck, a built-in
swimming pool, or a second bathroom would be considered an improvement. In
contrast, a repair simply keeps your home in good operating condition. Regular
repair and maintenance (e.g., repainting your house and fixing your gutters) are not
considered improvements and are not included in the tax basis of your home.
However, if repairs are performed as part of an extensive remodeling of your home,
the entire job may be considered an improvement.

Tip 42- Knowing How to Adjust Home Purchase Costs
Buying a home is confusing enough without wondering how to handle the

settlement charges at tax time. When you take out a loan to buy a home, or when
you refinance an existing loan on your home, you'll probably be charged closing
costs. These usually include points, as well as attorney's fees, recording fees, title
search fees, appraisal fees, and loan or document preparation and processing fees.
You'll need to know whether you can deduct these fees (in part or in full) on your
income tax return, or whether they're simply added to the cost basis of your home.
Before we get to that, let's define one term. Points are costs that your lender charges
when you take a loan secured by your home. One point equals 1 percent of the loan
amount borrowed. As a home buyer, you can deduct points in the year that you buy
your home if you itemize your deductions. However, you must meet certain
requirements. You can even deduct points that the seller pays for you. More
information about these requirements is available in Tax Department or Authority
publications.
Refinanced loans are treated differently. The points that you pay on a refinanced
loan generally must be amortized over the life of the loan. In other words, you can
deduct a certain portion of the points each year. There's one exception: If part of the
loan is used to make improvements to your principal residence, you can generally
deduct that portion of the points in the year that the points are paid.
And what about other closing costs? Generally, you cannot deduct these costs on
your tax return. Instead, you must adjust your tax basis (the cost, plus or minus
certain factors) in your home. For example, if you're buying a home, you'd increase
your basis with certain closing costs. If you're selling a home, you'd decrease your
amount realized from the sale (i.e., your sale price). For more information, see Tax
Department or Authority publications.
Tip 43- Planning the Sale of Your Home
Now let's see what happens when you sell your home. If you sell your principal
residence at a loss, you generally can't deduct the loss on your tax return. If you sell
your principal residence at a gain, however, you may be able to exclude from
taxation all or part of the capital gain.
Generally speaking, capital gain (or loss) on the sale of your principal residence
equals the sale price minus your adjusted basis in the property. Your adjusted basis
is the cost of the property (i.e., what you paid for it initially), plus amounts paid for
capital improvements, less any depreciation and casualty losses claimed for tax
purposes.

If you meet the requirements, you can exclude from income tax up to a limit of any
capital gain that result from the sale of your principal residence, regardless of your
age. In general, an individual, or either spouse in a married couple, can use this
exclusion only once every two years. To qualify for the exclusion, you must have
owned and used the home as your principal residence for specified period of time.
What if you fail to meet the time limit rule? Or what if you used the capital gain
exclusion within the specified period with respect to a different principal residence?
You may still be able to exclude part of your gain if your home sale was due to a
change in place of employment, health reasons, or certain other unforeseen
circumstances. In such a case, exclusion of the gain may be prorated.
Additionally, special rules may apply in the following cases:
• If your principal residence contained a home office or was otherwise used

partially for business purposes
• If you sell vacant land adjacent to your principal residence
• If your principal residence is owned by a trust
• If you rented part of your principal residence to tenants
• If you owned your principal residence jointly with an unmarried taxpayer
Consult a tax professional for details.

Chapter 6
Tax Planning for Income

Tip 44- Some Ways to Reduce or Defer Your Income Tax
The goal of income tax planning is to minimize your income tax liability. You can
achieve this in different ways. Typically, though, you'd look at ways to reduce your
taxable income, perhaps by deferring your income or shifting income to family
members. You should also consider deduction planning, investment tax planning,
and year-end planning strategies to lower your overall income tax burden.
By deferring (postponing) income to a later year, you may be able to minimize your
current income tax liability and invest the money that you'd otherwise use to pay
income taxes. And when you eventually report the income, you may be in a lower
income tax bracket.
Certain retirement plans can help you to postpone the payment of taxes on your
earned income. With such a plan, for example, you contribute part of your salary
into the plan, paying income tax only when you withdraw money from the plan
usually at retirement. This allows you to postpone the taxation of part of your salary
and take advantage of the tax-deferred growth in your investment earnings.
There are many other ways to postpone your taxable income. For instance, you can
contribute to a traditional pension or provident fund, buy permanent life insurance
(the cash value part grows tax deferred), or invest in certain savings bonds. You may
want to speak with a tax professional about your tax planning options.
Tip 45- Shifting Income to Lower Tax Brackets
You can also minimize your income taxes by shifting income to family members who
are in a lower tax bracket. For example, if you own stock that produces a great deal
of dividend income, consider gifting the stock to your children. After you've made
the gift, the dividends will represent income to them rather than to you. This may
lower your tax burden. Keep in mind that you can make a tax-free gift of up to a
certain amount per year per recipient without incurring gift tax.
However, look out for the kiddies’ tax if your children are under age 18. This tax rule
provides that a child's unearned income over will be taxed at the parents' income
tax rate. Also, be sure to check the laws of your country before giving securities to
minors.

Other ways of shifting income include hiring a family member for the family
business and creating a family limited partnership. Investigate all of your options
before making a decision.
Tip 46-Take All Deductions Possible at the Right Time
Lowering your income tax liability through deductions is the goal of deduction
planning. You should take all deductions to which you are entitled, and time them in
the most efficient manner.
As a starting point, you'll have to decide whether to itemize your deductions or take
the standard deduction. Generally, you'll choose whichever method lowers your
taxes the most. If you itemize, be aware that some (or all) of your deductions may be
disallowed if your adjusted gross income (AGI) or total statutory income reaches a
certain threshold figure. If you expect that your AGI might limit your itemized
deductions, try to lower your AGI. To lower your AGI for the year, you can defer part
of your income to next year, buy investments that generate tax-exempt income, and
contribute as much as you can to qualified retirement plans.
Because you can sometimes control whether a deductible expense falls into the
current tax year or the next, you may have some control over the timing of your
deduction. If you're in a higher income tax bracket this year than you expect to be in
next year, you'll want to accelerate your deductions into the current year. You can
accelerate deductions by paying deductible expenses and making charitable
contributions this year instead of waiting until next.
Tip 47- The Basics of Investment Tax Planning
Investment tax planning seeks to lower your overall income tax burden through
wise investment choices. Several strategies exist. These include investing in tax-
exempt securities and timing the sale of capital assets properly.
Although income is usually taxable, several investments can generate tax-exempt

income. For example, the interest on certain treasury bills and bonds may be exempt
from income taxes. When comparing taxable and tax-exempt investments, you'll
want to focus on those vehicles that maximize your after-tax return.
In most cases, long-term capital gains tax rates are lower than ordinary income
rates. You may be able to time the sale of your capital assets (such as stock) so as to
minimize your income tax liability. For example, if you expect to be in a lower
income tax bracket next year, wait until then to sell your stock. You may want to
accelerate income into this year, though, if you have capital losses this year and
need to offset them with capital gains. Note that capital gains increase your AGI,

which in turn may affect the amount of your itemized deductions and personal
exemption.
Tip 48-Year End Planning
Year-end tax planning, as you might expect, typically takes place in the last minute.
It involves timing your income so that it will be taxed at a lower rate and claiming
deductible expenses in years when you are in a higher income tax bracket. This
usually means postponing income to a later year and accelerating deductions into
the current year. For example, assume it's December and you're entitled to a year-
end bonus. However, you're in a higher tax bracket this year than you expect to be in
next year. The solution? Ask your employer to pay it to you in January of next year,
rather than now (assuming that the tax year ends in December). This will allow you
to postpone the taxable income. Also, if you have major expenses or work scheduled
for the beginning of next year, reschedule for December to take advantage of the
deduction this year. If you expect to be in a higher tax bracket next year, however,
you should accelerate your income into this year and defer your deductions until
next year.

Chapter 7
Tax Planning for the Self-Employed

Tip 49-Business and Self-Employment Expenses Must be Documented
Self employment expenses must be documented. There are instances where the tax
courts have disallowed what might otherwise have been legitimate expenses
because of poor or nonexistent documentation. A lack of proof to support the
taxpayer's argument in the event of a dispute with the Tax Department or Authority
could also lead to the imposition of fines or penalties
Tip 50- Document Work Content and Salaries Paid to Family Members
Salaries paid to a family member or spouse may be allowed provided that the
individual becomes eligible to pension contributions
You should be especially vigilant about documenting the work carried out by family
members in order to help prove the compensation they received was equitable.
Also consider salary vs. dividends-when determining the optimal mix of salary and
dividends ensure that personal tax credits are fully used. Maintain desirable levels
of salary for purposes of pension contributions.
Tip 51- Methods to Reduce Self-Employed Business Corporate Taxes
Accrued bonuses-you may also want to consider paying out active corporate income
that would otherwise attract high corporate rates as bonuses. Note however that
accrued bonuses must be paid within a specified time after the fiscal year-end.
Related issues affecting business income and dividends- establishing a management

company or professional corporation because salaries paid by management
companies are effectively subject to value added tax exempt professional should
consider directly employing administrative staff.
Business partnerships-make sure that any partnership agreements are in writing

and can be accessed. Clearly in the event a future dispute should arise that needs to
be resolved in the courts this becomes essential.
Consider introducing family members as shareholders so they may participate in

dividend income and possibly directors' fees even if no direct involvement in
operations were present to justify salaries.

Capital dividends-you may still be eligible to receive dividends even after having
disposed of your shares provided you were the registered shareholder on the date
the dividend was declared.
Tip 52-Understand and Comply with Your Tax Responsibilities
Self-employment the opportunity to be your own boss, to come and go as you

please, and oh yes, to establish a lifelong bond with your accountant. If you're self-
employed, you'll need to pay your own taxes and take charge of your own
retirement plan, among other things. Here are some planning tips.
As a starting point, make sure that you understand (and comply with) your tax
responsibilities. You must pay this tax if you have more than a minimal amount of
self-employment income. If you file as a sole proprietor, independent contractor, or
statutory nonemployee, the net profit listed on your schedule is self-employment
income and must be included on return.
Tip 53- Making Your Tax Payments on Time
Employees generally have income tax (PAYE), Social Security tax (in the form of EPF
and ETF), and Medicare tax withheld from their paychecks. The types of taxes
withheld can vary between countries. But if you're self-employed, it's likely that no
one is withholding taxes from your income. As a result, you'll need to make
quarterly estimated tax payments on your own (using the Tax Department or
Authority specified forms) to cover your income tax and self-employment tax
liability. You'll probably have to make estimated tax payments, as well. If you don't
make estimated tax payments, you may be subject to penalties, interest, and a big
tax bill at the end of the year. For more information about estimated tax familiarize
with the Tax Department or Authority publications.
If you have employees, you'll have additional periodic tax responsibilities. You'll
have to pay employment taxes and report certain information. Stay on top of your
responsibilities and see the Tax Department or Authority publications for details or
else you might end up paying the taxes of your employees (which you need to
deduct from their salaries and wages and remit it the Tax Department or Authority).
Tip 54- Some Methods of Reducing the Self- Employment Income
Hiring a family member to work for your business can create tax savings for you; in
effect, you shift business income to your relative. Your business can take a deduction
for reasonable compensation paid to an employee, which in turn reduces the
amount of taxable business income that flows through to you. Be aware, though, that
the tax department or authority can question compensation paid to a family
member if the amount doesn't seem reasonable, considering the services actually
performed. Also, when hiring a family member who's a minor, be sure that your
business complies with child labor laws.
As a business owner, you're responsible for paying Social Security and Medicare
taxes or Employment Provident Fund (EPF) and Employment Trust Fund (ETF) on
wages paid to your employees. The payment of these taxes will be a deductible
business expense for tax purposes. As is the case with wages paid to all employees,
wages paid to family members are subject to withholding of income and
employment taxes, as well as certain taxes.
Tip 55- Choose the Best Retirement Plans with Tax Benefits
Because you're self-employed, you'll need to take care of your own retirement
needs. You can do this by establishing an employer-sponsored retirement plan,
which can provide you with a number of tax and nontax benefits. With such a plan,
your business may be allowed an immediate income tax deduction for funding the
plan. You can also generally place pretax income dollars into a retirement account to
grow tax deferred until withdrawal.
The type of retirement plan that your business should establish depends on your
specific circumstances. Explore all of your options and consider the complexity of
each plan. And bear in mind that if your business has employees, you may have to
provide coverage for them as well. For more information about your retirement
plan options, consult a tax professional or see Tax Department or Authority
publications.
Tip 56-Tax Planning Issues with Your Retirement Savings Plans
• Contribute to your retirement plans early in the year. If for example you
contribute DOLLARS 16,500 at the beginning of the year rather than the end
over the 25 year assuming an 8% rate of return you would have an extra
DOLLARS 96,500 in your retirement account.
• Individuals with low earned income that precludes their owing any tax should
still consider filing the tax return in order to create retirement contribution
room for future use.
Tip 57- Credit Proof Your Retirement Plan
In the event of bankruptcy creditors' are able to seize funds from most retirement
plans held at financial institutions. However retirement plans through an insurance
policy that is properly structured in terms of tax benefits are generally exempt from
creditors under the bankruptcy acts. Therefore most individuals particularly if they
are self-employed and face a potentially greater risk of bankruptcy should consider

credit proofing at least a portion of their retirement plan portfolio in this fashion.
Your accountants could help you to set this up.
Tip 58- Plan the Timing of Inflows and Outflows to Your Retirement Plans
• You do not have to deduct retirement contributions the year in which it is made.
Instead you can carry it forward for deduction in the future when you have
income placing you in a higher tax bracket. Be sure you have used all personal
tax credits before deducting your retirement contribution.
• If you don't have enough cash to prop up your retirement plan consider making
a contribution in view of cash or in kind as it is commonly phrased. The asset
transferred must be a qualified investment. These may include publicly listed
stocks and some private company shares if they are held at arm's length,
corporate and government bonds, debentures and similar obligations. Be careful
when transferring investments that have declined in value because that loss will
be ignored for tax purposes.
• If you have both the regular and a spousal retirement plan you can transfer the
proceeds of one plan into the other prior to maturity or combine them into a
spousal plan if you believe that will provide certain advantages such as
administrative ease or reduction of retirement plan fees. The combined new plan
would then be classified as a spousal plan.
• Beware of the tax consequences when transferring investments to your

retirement plan. The Tax Department or Authority treats such transfers as being
similar to a sale of the investment. Moreover deemed capital gains triggered by
the transfer to the retirement plan are taxable deemed capital losses are not
deductible. So instead of transferring a money-losing investment to your
retirement plan consider selling it and then contributing the cash to your
retirement plan and repurchasing the investment within the retirement plan.
This will crystallize a capital loss.
Tip 59- Issues of Transforming Retirement Plans to Annuity
When deciding whether to convert your retirement plan into a retirement annuity
there are a number of factors to consider. If you are holding a retirement annuity for
instance you are able to remain active in making investment decisions. However
transferring it to an annuity the underlying investment portfolio decisions are made
by the financial professionals who in turn assume the risk and provide you with a
steady income for a fixed period of time for the rest of your natural life. Also while
you can convert all or part of your retirement plan to retirement annuity anytime
once annuities have been established they are permanent.

Tip 60-Deduction of Business Expenses
Because deductions lower your taxable income, you should make sure that your
business is taking advantage of any business deductions to which it is entitled. You
may be able to deduct a variety of business expenses, including rent or home office
expenses, and the costs of office equipment, furniture, supplies, and utilities. To be
deductible, business expenses must be both ordinary (common and accepted in
your trade or business) and necessary (appropriate and helpful for your trade or
business). If your expenses are incurred partly for business purposes and partly for
personal purposes, you can deduct only the business-related portion.
If you're concerned about lowering your taxable income this year, consider the
following possibilities:
• Deduct the business expenses associated with your motor vehicle, using
either the standard mileage allowance or your actual business-related
vehicle expenses to calculate your deduction
• Buy supplies for your business late this year that you would normally
order early next year
• Purchase depreciable business equipment, furnishings, and vehicles this
year
• Deduct the appropriate portion of business meals, travel, and
entertainment expenses
• Write off any bad business debts on a specific manner (with reasonable
proofing) rather than making general provisions.
Self-employed taxpayers who use the cash method of accounting have the most
flexibility to maneuver at year-end. See a tax specialist for more information.
Tip 61-Interest Expense Deductibility
Provided interest on borrowed funds meets all of the criteria necessary to be

deductible for income tax purposes it does not matter whether the funds originate
from your country, are all foreign sources
Don’t forget that interest expense include elements of both simple and compound
interest
If you need to finance the business consider establishing a line of credit with your
financial institution. The interest incurred on a line of credit used exclusively to
finance business purchases is tax deductible.

If you use your credit card for both personal and business oriented purchases keep
accurate records of the pro portion spent on business expenses because the
corresponding interest is tax-deductible.
Tip 62-Taxes and the Power of Personal Corporations
The employed and the self-employed middle class who earn over a certain amount
pay nearly 30% as taxes. That is they work four full months a year and pay it to the
government. Then the remaining 70% is used for consumption which attracts
another effective 17% (20/120) in the form of value added taxes. So you end up
paying almost 45% in the form of taxes on your hard work. That is almost 6 months
of free work for the government.
The harder they work to increase their salary above the threshold level inflation and
taxes will often pull back to the same level of living.
The power of personal corporations can protect your assets and income.
Corporations need not have big buildings and huge name boards on it. It is merely
some forms and documents filed with the Registrar of Companies and costs very
little to incorporate. The tax rates applicable to a small corporation are only 20%
compared to the 30% you may pay if you did not have your own corporation.
A corporation earns spends everything it can and is taxed on whatever is left.

Employees and those self-employed earn pay taxes and try to live with what is left.
If you own your corporation vacations abroad is export promotion. Car payments,
insurance, medical, club memberships, education, books and restaurant bills are all
corporation expenses paid legally with pre tax dollars.
Due to the limited liability protection personal assets will not be liable to recovery
as it is sheltered by the corporation. The owner controls it but does not own it.
Those self employed should consider the benefits dished by corporations with
reduced tax payments and legal protection. Those employed in corporations with
any forms of personal assets should also consider its benefits.

Chapter 8
Taxation of Investments
Tip 63-Differnent Types of Investment Incomes and Their Taxes
It's nice to own stocks, bonds, and other investments. Nice, that is, until it's time to
fill out your income tax return. At that point, you may be left scratching your head.
Just how do you report your investments and how are they taxed?
To determine how an investment vehicle is taxed in a given year, ask yourself what
went on with the investment that year. Did it generate income, such as interest? If
so, the income is probably considered ordinary. Did you sell the investment? If so, a
capital gain or loss is probably involved. (Certain investments can generate both
ordinary income and capital gain income, but we won't get into that here.)
If you receive dividend income, it may be taxed either as ordinary income or capital
gain income.
The distinction between ordinary income and capital gain income is important
because different tax rates may apply and different reporting procedures may be
involved. Here are some of the things you need to know.
However in most countries both interest and dividend incomes are both liable for
withholding and are deducted at source.
Tip 64- Value of Tax- Exempt and Tax Deferred Income
Investments often produce ordinary income. Examples of ordinary income include

interest and rent. Many investments including savings accounts, certificates of
deposit, money market accounts, annuities, bonds, and some preferred stock-can
generate ordinary income. Ordinary income is taxed at ordinary (as opposed to
capital gains) tax rates.
But not all ordinary income is taxable-and even if it is taxable, it may not be taxed
immediately. If you receive ordinary income, you must categorize it as taxable, tax
exempt, or tax deferred.
• Taxable income: This is income that's not tax exempt or tax deferred. If
you receive ordinary taxable income from your investments, you'll report
it on your income tax return. In some cases, you may have to detail your
investments and income on the required schedule.
• Tax-exempt income: This is income that's free from and/or income tax,
depending on the type of investment vehicle and the country of issue.
Municipal bonds and government securities are typical examples of
investments that generate tax-exempt income.
• Tax-deferred income: This is income whose taxation is postponed until
the future. For example, with a retirement plan, earnings are reinvested
and taxed only when you take money out of the plan. The income earned
in the plan is tax deferred.
A quick word about ordinary losses: It's possible for an investment to generate an
ordinary loss, rather than ordinary income. In general, ordinary losses reduce
ordinary income.
Tip 65- How to Vary the Basis of Your Investments for Maximum Tax Advantage
Let's move on to what happens when you sell an investment vehicle. Before getting
into capital gains and losses, though, you need to understand an important term-
basis. Generally speaking, basis refers to the amount of your investment in an asset.
To calculate the capital gain or loss when you sell or exchange an asset, you must
know how to determine both your initial basis and adjusted basis in the asset.
• Initial basis. Usually, your initial basis equals your cost-what you paid for the
asset. For example, if you purchased one share of stock for DOLLARS 10,000,
your initial basis in the stock is DOLLARS 10,000. However, your initial basis
can differ from the cost if you did not purchase an asset but rather received it
as a gift or inheritance, or in a tax-free exchange.
• Adjusted basis. Your initial basis in an asset can increase or decrease over
time in certain circumstances. For example, if you buy a house for
DOLLARS100, 000, your initial basis in the house will be DOLLARS 100,000.
If you later improve your home by installing a DOLLARS 5,000 deck, your
adjusted basis in the house may be DOLLARS 105,000. You should be aware
of which items increase the basis of your asset, and which items decrease the
basis of your asset.
Tip 66- Circumstances Can Change the Tax on Capital Gains. So Use Them Advantageously
If you sell stocks, bonds, or other capital assets, you'll end up with a capital gain or
loss. Special capital gains tax rates may apply. These rates may be lower than
ordinary income tax rates.
Basically, capital gain (or loss) equals the amount that you realize on the sale of your
asset (i.e., the amount of cash and/or the value of any property you receive) less
your adjusted basis in the asset. If you sell an asset for more than your adjusted
basis in the asset, you'll have a capital gain. For example, assume you had an
adjusted basis in stock of DOLLARS 10,000. If you sell the stock for DOLLARS
15,000, your capital gain will be DOLLARS 5,000. If you sell an asset for less than
your adjusted basis in the asset, you'll have a capital loss. For example, assume you

had an adjusted basis in stock of DOLLARS 10,000. If you sell the stock for DOLLARS
8,000, your capital loss will be DOLLARS 2,000.
A Certain schedule of your income tax return is where you'll calculate your short-
term and long-term capital gains and losses, and figure the tax due, if any. You'll
need to know not only your adjusted basis and the amount realized from each sale,
but also you’re holding period, your marginal income tax bracket, and the type of
asset(s) involved.
• Holding period: Generally, the holding period refers to how long you
owned an asset. A capital gain is classified as short term if the asset was
held for a year or less, and long term if the asset was held for more than
one year. The tax rates applied to long-term capital gain income are
generally lower than those applied to short-term capital gain income.
Short-term capital gains are taxed at the same rate as your ordinary
income.
• Marginal income tax bracket: Marginal income tax brackets are expressed
by their marginal tax rate (e.g., 15 percent, 25 percent). Your marginal tax
bracket depends on your filing status and the level of your taxable
income. When you sell an asset, the capital gains tax rate that applies to
the gain will depend on your marginal income tax bracket. Generally, a 5
percent long-term capital gains tax rate applies to individuals in the 10 or
15 percent tax bracket (this rate will be reduced or increased), while the
long-term capital gains of individuals in the other tax brackets are subject
to a flat somewhat slightly higher percent rate.
• Type of asset: The type of asset that you sell will dictate the capital gain
rate that applies, and possibly the steps that you should take to calculate
the capital gain (or loss). For instance, the sale of an antique is taxed at
the maximum tax rate even if you held the antique for a longer period of
time.
Tip 67- Match Capital Losses with Capital Gains
You can use capital losses from one investment to reduce the capital gains from
other investments. You can also use a capital loss against up to a limit of ordinary
income for a particular year. Losses not used this year can offset future capital gains.
Filling the said schedule of your income tax return can lead you through this
process.
If you have shares or debt of a corporation that has become insolvent it is possible
to make an election to be deemed to have disposed of the shares thus triggering a
capital loss. If the corporation involved is a small business corporation you might be
able to treat that loss as an allowable business investment loss.
Foreign currency fluctuations also create capital gains and losses.

Consider transferring active assets to a separate company you own to maintain
qualified small business corporation status
Tip 68- Plan your Investment Income and Expenses
If your spouse or common law partner does not pay enough tax to use his or her
dividend tax credit consider transferring their taxable dividends to your income. To
be eligible this transfer must increase the source of credit. The dividend tax credit
should have a greater impact in reducing tax payable the lower your taxable income
is.
Tip 69-Capital Gains or Ordinary Income
The proceeds of disposing from capital property have sometimes been ruled by the
courts to be income rather than capital gains if there is strong evidence that the
nature of such a transaction was purely speculative. That is the property was
purchased with the short term intent to sell rather than hold for use and capital
appreciation.
Tip 70-Ideas Related to Interest Expense Deductibility
Consider whether the following strategy might be beneficially to hold substantially

debt-free investments while owning personal property such as a home with a large
mortgage thus producing taxable income on the former and incurring nondeductible
interest on the latter. Sell the investment- use the proceeds to reduce the existing
mortgage- and arrange new financing using the home as collateral- use funds from
the new financing to purchase investment. Interest on the new mortgage might be
tax deductible as the funds were used to purchase income producing property.
In order to establish a direct link between interests that is payable on borrowed

funds for investment purposes consider practices such as keeping separate bank
accounts for businesses and personal funds
When selling your principal residence you would be prudent to fill out the required
forms especially in situations where doubt could arise with respect to any part of
the amount you are claiming.
A principal residence can include a house an apartment, condominium, duplex unit

or a mobile home trailer or even a houseboat.
In some instances certain individuals who are involved in the business of selling
homes may be denied the principal residence exemptions if the Tax Department or
Authority deems that the sale was a motive in the acquisition of a particular
property.
Tip 71- If in Doubt Ask for Help
The sale of some assets are more difficult to calculate and report than others, so you
may need to consult an Tax Department or Authority publication or other tax
references to properly calculate your capital gain or loss. Also, remember that you
can always seek the assistance of an accountant or other tax professional.

Chapter 9
Year-end Tax Planning

Tip 72-Art of Income Splitting and its Perils
If you earn more than your spouse you could reduce the family's combined tax bill
by paying the spouses expenses thus allowing them to save money for investment
purposes. The income and gains from these investments would then be taxed in
your spouse’s hands at presumably a lower tax rate. This strategy will also help to
even out future retirement income if you have been able to invest in a tax-deferred
retirement plan and your spouse has not.
If you earn less than your spouse keep a clear record of the source of your
investment funds to ensure that your investment income is attributed to you. This
could be accomplished by for instance depositing your personal income into a
separate bank account rather than a joint account. Then those funds could be used
to make investments in your name.
If you have an investment that has gone down in value and your spouse has capital
gains consider selling your investment to your spouse for fair market value. To
purchase your investment your spouse could give you a promissory note at the
prescribed rate instead of cash to be used for personal expenses on an asset on
which there will be no taxable gain or loss upon sale. If your spouse holds the
transferred investment for more than the required number of days before selling it
they may have a capital loss from the sale with which to offset their capital gains.
Be aware of that if you have any tax liabilities outstanding at the time you transfer
property to a spouse or other family members under some circumstances it may be
deemed by the tax courts as being joint and severally liable and therefore partially
responsible for your liability.
If you and your spouse or common law partner is receiving approximately the same
level of benefit prior to an assignment splitting benefits will not likely be
worthwhile. But if one partner receives greater benefits and has a higher taxable
income than the others you may achieve some advantage.
Tip 73- Tax Projections
As the end of the year approaches, it's time to consider strategies that can help you
reduce your tax bill. But most tax tips, suggestions, and strategies are of little
practical help without a good understanding of your current tax situation. This is

particularly true for year-end planning. You can't know where to go next if you don't
know where you are now.
So take a break from the usual chores and pull out last year's tax return, along with
your current pay stubs and account statements. Doing a few quick projections will
help you estimate your present tax situation and identify any glaring issues you'll
need to address while there's still time.
Tip 74- Adjusting the Final Withholdings Based on the Tax Projections
If you project that you'll owe a substantial amount when you file this year's income
tax return, ask your employer to increase your income tax withholding amounts. If
you have both wage and consulting income and are making estimated tax payments,
there's an added benefit to doing this: Even though the additional withholding may
need to come from your last few paychecks, it's generally treated as having been
withheld evenly throughout the year. This may help you avoid paying an estimated
tax penalty due to under withholding.
Of course, if you've significantly overpaid your taxes and estimate you'll be receiving
a large refund, you can reduce your withholding accordingly, putting money back in
your pocket this year instead of waiting for your refund check to come next year.
Tip 75- Realize that the AMT Snags everyone and Plan for it
Originally intended to prevent the very rich from using "loopholes" to avoid paying
taxes, the alternative minimum tax (AMT) snags more and more middle-income
taxpayers every year, since (unlike regular income tax) it doesn't keep pace with
inflation. The AMT is governed by a separate set of rules that exist in parallel to
those for the regular income tax system. These rules disallow certain deductions
and personal exemptions that you are allowed to include in computing your regular
income tax liability, and treat specific items, such as incentive stock options,
differently. As a result, AMT liability may be triggered by such items as:
• Large numbers of personal exemptions

• Large deductible medical expenses
• Large deductions for state, local, personal property, and real estate taxes
• Home equity loan interest where the financing isn't used to buy, build, or
improve your home
• Exercising a large incentive stock option
• Large amounts of miscellaneous itemized deductions such as
unreimbursed employee business expenses
So when you sit down to project your taxes, calculate your regular income tax and
then consider your potential AMT liability. If it appears you'll be subject to the AMT,

you'll need to take a very different planning approach during the last few months of
the year. Even some of the most basic year-end tax planning strategies can have
unintended consequences under AMT rules. For example, accelerating certain
deductions into this year may prove counterproductive since AMT rules may
require you to add them back into your income. See a tax professional for
information on your specific tax situation.
Tip 76- Play the Timing Game
The last few months of the year may be the time to consider delaying or accelerating
income and deductions, taking into consideration the impact on both this year's
taxes and next. If you expect to be in a different tax bracket next year, doing so may
help you minimize your tax liability. For instance, if you expect to be in a lower tax
bracket next year, you might want to postpone income from this year to next so that
you will pay tax on it next year instead. At the same time, you may want to
accelerate your deductions in order to pay less tax this year.
To delay income to the following year, you might be able to:
• Defer compensation
• Defer year-end bonuses
• Defer the sale of capital gain property (or take installment payments
rather than a lump-sum payment)
• Postpone receipt of distributions (other than required minimum
distributions) from retirement accounts
To accelerate deductions into this year:
• Consider paying medical expenses in December rather than January, if

doing so will allow you to qualify for the medical expense deduction
(assumed tax year ends in December)
• Prepay deductible interest
• Make alimony payments early
• Make next year's charitable contributions this year
Tip 77- Giving Gifts Can be Good Tax Planning
If you itemize your deductions, consider donating money or property to charity

before the end of the current tax year in order to increase the amount you can
deduct on your taxes. As an aside, now is also a good time to consider making
noncharitable gifts. You may give up to a particular limit to as many individuals as
you want without incurring any gift tax consequences. If you gift an appreciated

asset, you won't have to pay tax on the gain; any tax is deferred until the recipient of
your gift disposes of the property.
Tip 78- Maximize Pretax Contribution to a Retirement Plan
To reduce your taxable income this year, consider maximizing pretax contributions
to an employer-sponsored retirement plan. You won't be taxed on the contributions
you make now, and you may be in a lower tax bracket when you do eventually
withdraw the funds and report the income.
If you qualify, you might also consider making either a tax-deductible contribution
to a traditional fund or an after-tax contribution to a different fund. In the first
instance, a current income tax deduction effectively defers income and its taxation
to future years; in the second, while there's no current tax deduction allowed,
qualifying distributions you take later will be tax free. You'll generally have until the
due date of your income tax return to make these contributions.

Chapter 10
Personal Deduction Planning

Tip 79- The Game of Deduction Planning
Taxes, like death, are inevitable. But why pay more than you have to? The trick to
minimizing your income tax liability is to understand the rules and make the most of
your tax planning opportunities. Personal deduction planning is one aspect of tax
planning. Here, your goals are to use your deductions in the most efficient manner
and take all deductions to which you're entitled.
Your first step is to understand how deductions work. You subtract certain
deductions from your total income to arrive at your adjusted gross income (AGI).
Then, you subtract other deductions and exemptions from your AGI to determine
your taxable income. Your tax liability is calculated based on your taxable income.
Generally speaking, therefore, the higher your deduction level, the lower your tax
liability.
Tip 80-Should you Itemize or Standardize?
After you've computed your AGI, you'll want to subtract the greater of either the
standard deduction or the total of your itemized deductions. The standard
deduction is a fixed DOLLARS amount, indexed for inflation yearly, that is
determined according to your filing status (e.g., married filing jointly, single and
they are applicable to your country) and certain circumstances. Itemized deductions
are various deductions that are reported on a particular schedule of your tax return.
They involve certain personal expenses, such as medical expenses, mortgage
interest, state or provincial taxes, charitable contributions, theft losses, and
miscellaneous itemized deductions. If you have enough of these types of expenses,
your itemized deductions may exceed your standard deduction. In that case, it
would be to your advantage to itemize.
When filling out your tax return, how do you know whether to take the standard
deduction or itemize? You should calculate your taxes using both methods, and go
with the one that lowers your tax liability the most. Be aware that there are some
limitations regarding who can use the standard deduction and who can itemize.
Also, certain itemized deductions are available to you only if your expenses exceed a
particular percentage of your AGI. For example, miscellaneous itemized deductions
are allowed only to the extent that they (when totaled) exceed a given percent of
your AGI.

Tip 81- Medical and Dental Expenses Deductions
The medical and dental expenses deduction is an itemized deduction that you may
take (within certain limits) for unreimbursed medical and dental expenses you paid
during the year for yourself, your spouse, and your dependents. You may be
surprised to learn which medical and dental expenses are deductible and which are
not; the line is sometimes blurry. For example, you can't deduct your expenses for
nicotine gum, but you can deduct your fee for a smoking cessation program. Many
expenses qualify for this deduction, including acupuncture treatments, crutches,
eyeglasses, and prescription drugs. You should obtain Tax Department or Authority
publications for an authoritative list of eligible and nondeductible expenses. If you
don't review this list, you may miss out on some important tax-saving opportunities.
You can take this deduction only to the extent that your unreimbursed medical
expenses exceed a given percent of your AGI. That might sound complicated, but
here's how it works. First, add up your eligible medical expenses. You can deduct
only part of that total on the said schedule of your income tax return. The schedule
will actually lead you through this calculation. On that form, you'll multiply your AGI
by the given or said percent. The figure you come up with will represent the amount
of your medical expenses that you cannot deduct. Subtract this figure from your
total eligible medical expenses. The remaining amount is your medical deduction.
Tip 82- Balancing the AGI to Consider the Itemized Deduction
Many deductions are affected by your AGI. If you itemize your deductions, you
should be aware that some of your deductions might be limited or disallowed if your
income level is too high. How high is too high? Well, the amount of your allowable
itemized deductions may be limited if your AGI exceeds a threshold level for most
filers.
If you expect that your AGI will exceed the threshold this year, you may be able to
take steps to lower your AGI. You can try to lower your AGI by deferring
(postponing) part of your income to next year, buying investments that generate
tax-exempt (rather than taxable) income, and contributing as much as you can to
qualified retirement plans. Lowering your AGI may allow you to take full advantage
of your itemized deductions. This, in turn, will help reduce your tax liability.
Tip 83- Plan the Timing of Your Itemized Deductions
For most people, income is reported in the year that it's received, while deductions
are generally taken for the year in which expenses are paid. In many cases, you can
control whether you incur an expense this year or next. That means that you can
control the timing of your itemized deductions to some extent. If you're in a higher
income tax bracket this year than you expect to be in next year, you may want to
accelerate your deductions into the current year to minimize your tax liability. You
can do this by paying deductible expenses before year-end and making charitable
contributions before year-end. For example, if you have major dental work
scheduled for January of next year, you can reschedule for December to take
advantage of the deduction this year. Here are some tips:
• If you pay a deductible expense by check, make sure it's dated and mailed
before year-end. It needn't clear the bank by year-end, however.
• If you pay by credit card, the expense is deductible in the year the charge
is incurred, not when the credit card bill is paid.
• A mere pledge or promise to make a charitable contribution is not
deductible.
• Along with your cash contributions to a charity, remember to deduct
noncash contributions like clothes. You can also deduct mileage if you use
your car for charitable purposes.
Tip 84-Accelerating Deductions/Postponing Income
If you'll be in a lower tax bracket next year, you may wish to accelerate your
deductions into this year and postpone your income into the following year.
You can accelerate your deductions into this year by:
• Making next year's charitable contributions this year instead

• Prepaying deductible interest
• Paying estimated tax installments in December instead of January
(assumed tax year end is December rather than March)
• Accelerating capital losses
• Taking advantage of flexible spending accounts, and cafeteria plans
• Making January's alimony payment in December (assumed tax year end is
December rather than March)
You can postpone your income into the following year by:
• Delaying the collection of any debts that you are owed

• Deferring compensation
• Deferring year-end bonuses
• Delaying the exercise of incentive stock options
• Transferring funds to bank certificates and Treasury bills in order to
delay tax on the interest
• Setting up a tax-deferred annuity or retirement account

• Deferring the sale of capital gain property, or taking installment
payments rather than a lump-sum payment
• Postponing receipt of distributions that are over the required minimum
from retirement accounts
• Increasing your contributions to your company's Tax Department or
Authority approved retirement plan or other tax-deferred plans
Tip 85-Accelerating Income/Postponing Deductions
If you'll be in a higher tax bracket next year, you may wish to accelerate your income
into this year and postpone your deductions into the following year.
You can accelerate your income into this year by:
• Collecting any debts you are owed

• Taking distributions from your retirement plan if you will not incur an
early withdrawal penalty
• Collecting accounts receivable if you're self-employed and use the cash
method of accounting
• Arranging to receive dividends
• Settling lawsuits, insurance claims, etc.
• Selling any assets that would result in a capital gain
You can postpone your deductions into the following year by:
• Postponing charitable gifts

• Paying December's deductible expenses on January 1(Again assuming the
tax year end is December 31 and not March 31)
• Delaying the payment of deductible interest
• Scheduling nonemergency dental and doctor's visits for the following
year
• Delaying the realization of deductible capital losses

Chapter 11
Qualifying for the Home Office Deduction

Tip 86- The Advantages of a Home Office
Working from home can certainly provide you with personal benefits, such as a
flexible schedule and more family time. But increasing numbers of people are
discovering the tax advantages as well. It's no secret that you generally can't deduct
certain personal expenses (e.g., homeowners insurance, utilities, and home repair)
on your income tax return. But if you're using part of your home as a home office,
you may be able to write off part of these expenses. To qualify for the home office
deduction, you must first understand the Tax Department or Authority
requirements.
Tip 87- Make Sure Your Home Office is according to the Definition
First of all, what is a home office? A home office is a room in your home, a portion of
a room in your home, or a separate building next to your home (such as a converted
garage or barn) that you use exclusively and regularly to conduct business activities.
This definition is important, because you may be able to deduct part of your housing
expenses (such as rent, utilities, and insurance) on your income tax return if you
have a home office. This deduction (or group of deductions) is known as a home
office deduction. To take the deduction, you'll need to file a special form or schedule
with the Tax Department or Authority. To even consider the home office deduction,
though, your at-home business activities must involve a trade or business and a
hobby won't do.
Now let's consider the Tax Department or Authority requirements. To qualify for a
home office deduction, you must meet two threshold tests
1. The place of business test

2. The regular and exclusive use test
The place of business test is somewhat flexible-To pass this test, you must show that
you use part of your home as:
• The principal place of business for your trade or business, or

• A place where you regularly meet with clients, customers, or
patients
In some cases, you can also meet the principal place of business requirement if
you conduct substantial administrative and management tasks for your outside

business at home and have no other fixed location where you conduct these
activities. These tasks might include billing customers, keeping books and
records, ordering supplies, setting up appointments, or writing reports. For
example, assume you're a doctor at a local HMO who's been given examination
space but no office space. You use a room in your home regularly and exclusively
to correspond with insurance companies, bill patients, and read medical
journals. You have no other fixed location for conducting these types of
activities. In such a case, your space would likely pass the place of business test
for a home office deduction.
What if your home office is in a separate structure next to your home, like a shed
or garage? In such a case, that needn't be your principal place of business.
However, you must use that office regularly and exclusively in connection with
your trade or business. Be sure you use this structure only for business
purposes--you can't store your car there.
You must also meet the regular and exclusive use test -In general, you must also pass
the regular and exclusive use test before you can take a home office deduction
(exceptions apply in certain jurisdictions for taxpayers who run day-care
facilities from home and for sellers who use part of their homes for storing
inventory). As you might expect, this test requires you to show that you
exclusively use a portion of your home for business purposes on a regular basis.
For example, assume you set aside one room in your home as your home office.
You also use this room as a playroom for your children. Here, you wouldn't meet
the exclusive use test. Now assume that you use one room in your home
exclusively for your side business of selling insurance. You engage in this
business only occasionally. Because you don't use the office on a regular basis,
you still won't qualify for the home office deduction.
Tip 88- Tax Benefits of Taking Work Home
If you telecommute or are an employee who works at home, you may also qualify for
the home office deduction. In addition, though, your home office must be for the
convenience of the employer. In plain English, this means that your employer must
ask you to work out of your home. The arrangement must serve your employer's
business needs, not vice versa.
The home office deduction for an employee who works at home is taken as a
miscellaneous itemized deduction on a specific schedule. This deduction is subject
to the percent limit for miscellaneous itemized deductions.
As most employees today take work home or use this option ask your employer for
a letter substantiating this. This may save you a substantial deduction from tax.

Tip 89- Deductible Expenses of Your Home Office
You can deduct both your direct and indirect expenses regarding your home office.
Direct expenses are costs that apply only to your home office. You can deduct these
costs in full against your business income. Some examples include the cost of a
business telephone line and the cost of painting your home office. However, no
deduction is allowed for some items such as basic local telephone charges on the
first line in your home, even if that line is used for the home office.
Indirect expenses are costs that benefit your entire home. You can deduct only the
business portion of your indirect expenses. Some examples of indirect costs include
rent, deductible mortgage interest, real estate taxes, and homeowners insurance.
The business percentage of your home is determined by dividing the area
exclusively used for business by the total area of the home. For example, assume
your home is 2,000 square feet and your home office is 200 square feet. Your
business percentage is 10 percent (200 divided by 2,000). In such a case, if you rent
your home, you can deduct 10 percent of your rent as part of your home office
deduction.
Even if you don't qualify for the home office deduction and are unable to deduct
home-related expenses (e.g., homeowners insurance), you can still take a deduction
for your regular business expenses, such as the purchase of file cabinets, business
equipment, and supplies.
Tip 90- Deductions and Carry Forwards of Losses
If the gross income from your home office equals or exceeds your regular business
expenses (including depreciation), all expenses for the business use of your home
can be deducted. But if your gross income is less than your total business expenses,
certain expense deductions for the business use of your home are limited. The
deduction isn't lost forever, though. It's simply carried forward to the next year.
Tip 91- Avoiding the Tax Department Scrutiny
In the past, the Tax Department or Authority has closely scrutinized home office
deductions. Although it has eased up a bit perhaps because legitimate home offices
are commonplace today you can never be too careful. Here are some steps you can
take to substantiate the existence of your home office:
• Use your home address on your business cards, stationery, and

advertisements
• Install a separate telephone line for your business

• Instruct clients or customers to visit your home office, and keep a log of
those visits
• Log the dates, hours spent, and type of work performed in your home
office
• Have business mail sent to your home
Tip 92- Know the Perils of Tax When Selling Your Home with a Home Office
Unless you're careful, deductions today can cost you money when you sell your
home. Homeowners who meet all requirements can generally exclude from income
tax up to a specified amount of capital gain when a principal residence is sold. You
may end up paying some taxes, though, if you have a home office. That's because
when you sell your principal residence, an amount of capital gain equal to certain
depreciation deductions you were entitled to (as a result of having your home
office) won't qualify for the exclusion. Specifically, the exclusion won't cover an
amount equal to depreciation deductions attributable to the business use of your
home.
Note: In addition, where the business portion of the home is separate from the
dwelling unit (e.g., an office in a converted detached garage) any capital gain on the
sale of the house has to be apportioned; only the part of the gain allocable to the
residential portion is eligible for exclusion.
For example, assume a self-employed accountant bought a home in 1998 and sells
the home several years later at a DOLLARS 20,000 gain. Although the house was
always used as his principal residence, the accountant used one room within the
house as his business office. Over the years, the accountant claimed DOLLARS 2,000
of depreciation deductions for his office. Under Tax Department or Authority
regulations, DOLLARS 18,000 of the capital gain will be tax free. Only the DOLLARS
2,000 of the gain equal to the depreciation deductions will be taxable. Remember
currently in Australia capital gains are not taxable.
If the accountant's office had been located in a converted detached garage on his
property, he would have to treat the sale as two separate transactions and pay tax
on any gain allocable to the converted garage.
Because this area is complex, you should consult a tax professional.

Chapter 12
Understanding Personal Tax Credits

Tip 93- Discern the Value of Tax Credits
Have you ever thought that you're paying too much income tax? You may be, if
you're not claiming all of the tax credits for which you are eligible when you file
your tax return. These credits may significantly reduce your tax liability.
A tax credit is a DOLLARS -for-DOLLARS reduction of your tax liability. Generally,

after you've calculated your taxable income and worked out how much tax you owe,
you can subtract the amount of any tax credit for which you are eligible from your
tax obligation. In some cases, if your tax credits exceed your tax liability, you will be
able to claim the difference as a refund.
What is the difference between a tax deduction and a tax credit? A tax deduction reduces your
taxable income, so that when you calculate your tax liability, you're doing so against
a lower amount. Essentially, your tax obligation is reduced by the same percentage
as your tax rate.
Here's an example. If you're in the 28 percent marginal tax bracket and you have
DOLLARS 1,000 in tax deductions, your tax liability will be reduced by DOLLARS
280. That reduction would be greater if you were in a higher tax bracket.
A tax credit, on the other hand, is constant. A tax credit of DOLLARS 100 will reduce
your tax liability by DOLLARS 100, regardless of your tax bracket. The following is a
summary of the main personal tax credits that may be available to you. However
please note these vary from country to country and are mostly linked to living style
and demographics. For example most of them are not applicable to Australia.
Tip 94- Possible Tax Credits
You may also be eligible for other tax credits, including the credits listed below:
1. Adoption tax credit

2. Tax credit for the elderly or the disabled
3. Foreign tax credit
4. Tax credit for retirement plans
5. Tax credit for health insurance costs (for qualifying individuals)
6. Tax credit for qualified alternative fuel (or clean-fuel) vehicles
7. Tax credit(s) for making energy-efficient improvements to a primary
residence, or for purchasing qualified energy-efficient property

Chapter 13
Tax Planning Tips on Auto Insurance and Long Term Care

Insurance
Tip 95-Dividends from Life-Insurance Policies
Don’t confuse insurance policy dividends with corporate dividends. Dividends are
not the distribution of corporate profits. They are a return of premiums and as such
are not taxable.
Tip 96- Vehicle Expense Deductions
It's no secret that auto insurance can safeguard your assets and provide you with
peace of mind. But did you know that auto insurance may also benefit you at tax
time? Certain insurance-related costs can be deducted on your individual income tax
return. You'll need to know what can be deducted, and how insurance
reimbursements can affect those deductions.
• You can't deduct your auto insurance premiums if you use your car
only for personal purposes-If you use your motor vehicle only for
personal purposes (like most people), you can't deduct your auto
insurance premiums on your tax return.
• If you use your car for business purposes, you may be able to deduct
some car-related expenses, including insurance premiums-Whether
you're self-employed or an employee, you may be able to deduct certain
car-related expenses if you use your car for business purposes. However,
if you use your car on business and your employer fully reimburses you
for your expenses, you can't deduct those expenses. If you use your car
for both personal and business reasons, you can deduct only that portion
of your car expenses that can be traced to business use. (For individual
taxpayers, commuting to work normally doesn't qualify as business use.)
There are two methods for calculating auto expense deductions--the standard
mileage allowance and the actual expenses method:
1. Standard mileage allowance: If you own or lease a car and are not
reimbursed for the business use of your vehicle, you may be able to deduct a
standard mileage rate per mile for each mile you use your car on
business. Several requirements apply, however. You can also deduct the cost

of business-related tolls and parking (but not commuting-related tolls and
parking).
2. Actual expenses method: You may be able to deduct the actual cost of using
your vehicle for business. Your business expenses can include depreciation,
tolls, parking fees, insurance premiums, repairs , gas and oil, rental fees,
lease fees, excise taxes, and garage rental fees (to the extent that the costs
were related to business and not your personal use).
No matter which method you use, the Tax Department or Authority requires that
you keep careful records of your business travel, including the dates you used your
car, the number of miles driven, and the reason for the travel on business-related
tasks.
Tip 97- Tax Benefit to Cover Vehicle Casualty or Theft
If your car is stolen, damaged, or destroyed in an accident or by an act of nature

(e.g., fallen tree, flood), you may be able to claim a theft or casualty loss tax
deduction if your auto insurance coverage does not completely reimburse you for
your loss. (A casualty is the damage, destruction, or loss of property resulting from
an identifiable event that is sudden, unexpected, or unusual.)
Consult a tax professional if you need help to calculate the maximum deduction
possible.
If you're reimbursed for your loss, you must subtract the reimbursement when
calculating your loss. In other words, you do not have a casualty or theft loss to the
extent you are reimbursed. If your property is covered by insurance, you should file
a timely insurance claim for reimbursement of your loss. Otherwise, you may not be
able to deduct your loss. Generally, you must also file a police report for any theft
losses.
Tip 98- Benefits not Covered by Auto Insurance Can Also be Deducted for Tax
Purposes
Auto insurance protection does not begin until the deductible has been satisfied. So,
if you have an auto insurance policy with a DOLLARS 500 collision deductible and
you get into an accident, you'd have to cover the first DOLLARS 500 of your loss out
of pocket. At tax time, though, this deductible may be written off on your tax return
(subject to certain limits) as a casualty loss if you meet all necessary requirements.
However, you can't deduct a casualty loss involving a car accident if your willful
negligence or willful act caused the accident.

Tip 99- Consider the Tax Benefits of Different Long-Term Care Insurance
Policies
Your chances of requiring some sort of long-term care increase as you age. Because
long-term care insurance (LTCI) can pay for part or all of your long-term care
expenses, it can provide you with both peace of mind and financial protection.
Although tax issues are probably not foremost in your mind when you buy LTCI, it
still pays to consider them. In particular, you should explore whether your
premiums will be deductible and your benefits taxable.
You may be able to deduct all or part of the LTCI premiums you pay for yourself,
your spouse, or a dependent, but only if your policy meets the Tax Department or
Authority criteria for a qualified policy. First of all, the policy must provide coverage
only for qualified long-term care services. These include necessary diagnostic,
preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, as
well as maintenance or personal care services that are required by a chronically ill
individual, in connection with a plan of care prescribed by a licensed health-care
practitioner. Also, your policy must satisfy certain conditions which you may be able
to obtain from the Tax Department or authority publications or the Taxpayers
Assistance Units.
The amount of your deduction depends on a few factors. If your LTCI policy meets
the conditions prescribed at least part of your premium may be tax deductible as a
medical expense. To qualify for a medical expense deduction, your unreimbursed
medical expenses (including LTCI premiums) must exceed a given percent of your
adjusted gross income. Also, you must itemize your deductions.
Tip 100- Judge the Limits on the Tax Free Benefit of a Long Term Care
Insurance Policy
A qualified LTCI contract is treated as an accident and health insurance contract,

and the benefits are typically treated as tax free. However, if your contract pays a set
DOLLARS amount per day (per diem), the tax-free treatment is subject to a certain
limit, indexed annually for inflation. Benefits over and above this limit are generally
considered taxable income.
Under this limit, the amount of your LTCI benefits that is excluded from taxation in a
given period is figured by subtracting any reimbursement received (through
insurance or otherwise) for the cost of qualified long-term care services during the
period from the larger of the following amounts:
• The actual cost of qualified long-term care services during the period
• The DOLLARS amount for the period

It's a different story if you have a nonqualified LTCI policy, though. Such benefits
may be subject to income tax.

Chapter 14
Tax Planning in Un-Chartered Seas- Using the Internet for

Tax Leverage
Why the Internet and E-Commerce Raise Tax Issues
E-commerce represents a new business model. As such, it creates some challenges
to tax systems that were designed with a different model in mind. Some of the key
reasons why e-commerce raises tax issues are explained below and since the laws
related in this area is still evolving you may be able to leverage this unclear domain
to your tax advantage.
Tip 101- Know and Use the Location Tax Advantage

Existing tax systems tend to determine tax consequences based on where the
taxpayer is physically located. The e-commerce model enables businesses to operate
with very few physical locations. An online vendor can easily sell to customers
throughout the world from a single physical location. The e-commerce business
model also involves more customized inventories so storage needs (and thus the
need for many physical locations) are reduced. Also, the model involves less vertical
integration and more outsourcing – again, fewer physical locations are used by a
vendor. Also, some business assets, such as servers, are not necessarily tied to a
single physical location, but can easily be relocated without any interruption to
business operations. That is, the location of the server is not relevant for business
purposes and thus, may not be a logical taxing point.
Location factors primarily raise tax issues at the international and state and local
levels, rather than at the country or national level. For example, the U.S. Supreme
Court has ruled that a state may only require a vendor to collect sales and use tax
if the vendor has a physical presence in the state. Also, outsourcing raises issues as
to the nature of the relationship between the company and the supplier to
determine if the supplier is the company’s agent creating a taxable presence
(nexus) for the company in the state.
Tip 102- Know and Use the Nature of Product to Your Tax Advantage
E-commerce allows for some types of products, such as newspapers and music
CDs, to be delivered in digitized (intangible) form, rather than in tangible form.
Digitized products raise issues at the state or provincial council level as to whether
sales tax applies and in which state income is generated for state income tax
purposes. Usually laws prohibits a state (or provincial council) from taxing a
foreign corporation's net income derived from activities within the state if those
activities consist merely of solicitation of orders for the sale of tangible personal
property that are approved, filled, and shipped from outside the state. This law

internationally is out-of-date today where the transfer of services and intangible
items is a significant business activity. The nature of products can also raise
income tax issues regarding the type of revenue generated and how it is to be
reported, as well as whether digitized products are subject to traditional inventory
accounting rules.
Tip 103- Know and Use the New Marketing Techniques to Your Tax
Advantage
The Internet has allowed for new ways of selling and buying goods and services.
For example, individuals can offer their unwanted items to a worldwide group of
potential buyers via auction sites, such as E-Bay. The Internet can also be used to
easily link business buyers and sellers through exchange web sites where buyers
post what they have to sell and sellers match up with them, or vice versa. Such
sites can almost operate without human intervention for the matching function. In
addition, the Internet has increased the use of bartering, most notably with
respect to exchange of web banners that serve as advertisements. These new
techniques raise various tax issues at all levels. For income tax purposes, issues
include whether an exchange intermediary or broker should be accounting for
inventory, and what amount of information reporting should be required for low-
value bartering transactions, and how such transactions should be valued. At the
international level, the source of the income generated (which country) might be
uncertain. At the state and local level, issues exist as to when individuals have sold
enough goods to be required to become sales tax collectors and how to enforce
such rules. Another issue raised by changes or elimination of intermediaries is that
some intermediaries collected excise tax, such as sellers of fishing equipment.
When buyers interact directly with a foreign manufacturer, rather than a domestic
retailer, the excise tax may go uncollected.
Tip 104- Know and Use New Types of Assets to Your Tax Advantage
Some of the new assets created by commercial use of the Internet are domain
names (URLs) and web sites. For income tax purposes, issues exist as to how to
treat the costs of creating or acquiring such assets, as well as the characterization
of any gain or loss generated upon disposition of the asset. Sellers of such assets
may face uncertainty in the law as to how to characterize the gain or loss
generated from the disposition (capital or ordinary).
Tip 105- Know and Use Remote Workforce to Your Tax Advantage
The workforce of an Internet company may be scattered throughout a state or
country, rather than working in a single work location together. This can raise
issues as to whether the presence of the employee in a particular state creates tax
obligations for the employer in that state. Also, cities may find that employers owe

business license taxes due to the presence of an employee in the city or that if the
worker is not an employee that the worker owes business license taxes.
Tip 106- Making Optimal Use of the Internet May Challenge Old Rules so Use
it to Your Tax Advantage
One area where use of the Internet has potentially raised some tax issues involves
how some tax-exempt organizations are using the Internet. For example, a tax-
exempt organization might allow donors to be listed on the organization’s Web
site. This may cause the entity to face issues as to whether the listing is merely an
acknowledgement or whether it is advertising that may result in unrelated
business taxable income (UBTI) for the organization. Another issue may exist
where an organization that primarily operates on the web, such as a non-profit
information exchange, meets the tax definition of a tax-exempt organization. Also,
the Internet may allow for more efficient interactions between a tax-exempt
organization and its donors, yet existing rules were not written with such
interactions in mind. For example, a receipt is required for certain donations in
order for the donor to be entitled to a deduction. Will a receipt generated by and
printable from a Web site constitute an appropriate acknowledgement for tax
purposes?
Tip 107- Know and Use the Nature of Transactions to Your Tax Advantage
The Internet allows for paperless transactions and the potential for the use of
electronic cash. This raises administrative concerns for the Tax Department or
Authority as to whether transactions were properly reported, whether an audit
trail exists, and whether new reporting rules are needed. The Internet provides
new ways for tax administrations to improve the ease and transparency of tax
collection. But new technology also raises certain problems. In a world where
cyber-transactions are growing at a rapid pace, tax administrations face the
challenge of adapting existing tax systems to an economy that increasingly ignores
physical borders. In such a world, it will be easier for companies to avoid tax
collectors by operating worldwide through web-sites based in jurisdictions that
are unwilling to share taxpayer information.

Chapter 15
International Tax Planning-Basic Techniques

Tips 108- The Hazards are high and so are the Rewards.
It's important to keep in mind, as one navigates the shoals of international tax
planning, just what the hazards are. We have tax codes throughout the world to
thank for the development of the offshore financial world. Without their assistance,
the Cayman Islands would probably be a set of desert islands and no one would ever
have heard of Vanuatu. One of the main purposes of this work is to reduce or
eliminate taxes. The countries we have been talking about here are called "tax
havens" after all.
Tax planning is the essence of offshore financial operations. Most of the players of
the international money game are overseas because of taxes. They share with all the
peoples of the world a desire to pay less tax.
Tip 109- Know the Essence of International Tax Planning
In principle, international tax planning is quite simple; the details are what drive
one mad. International tax planning is based on the fact that the revenue laws of any
country are largely restricted to its domestic economy. The tax authorities have a
hard time crossing borders but people and wealth can do so easily. You are strongly
advised to use a highly qualified and competent professional such as a Chartered
Accountant or CPA when planning for taxation on a global scale. A person can make
three basic changes in his tax situation through offshore tax jurisdictions.
• He can change his residence
• The geographic source of his income
• The form of the tax planning entities that he uses.
Tip 110- The Method of International Tax Planning
A tax haven is a country that imposes no taxes on the income of companies and
other entities so long as they do no local business beyond spending money. A treaty-
haven jurisdiction is a country that has a tax treaty in force with other high-tax
nations.
What one wants to do is to accumulate different forms of income through different

companies and trusts in various jurisdictions in such a way that the total tax bill is
minimized. Once the plan is in place, it might operate something like this: Income
arises in Australia but it belongs to a corporation that is physically located in
another country which has a tax treaty with Australia. The income passes to that
company with little or no withholding tax because the terms of the tax treaty

between Australia and the other country - a treaty haven in this case) - require a
lesser rate of withholding. If income is paid to a person or company in a jurisdiction
with to tax treaty with Australia, then the person paying the income must withhold a
said percent for Australia taxes. Now that the money is sitting in the treaty-haven
company, it is transferred to another entity - say a trust - in a tax haven jurisdiction,
where it is allowed to accumulate.
This tax plan would best be served by finding a tax-treaty jurisdiction that does not
tax Australian source income at all, so that the whole transaction could be carried
out free of taxation. In practice, this is not possible because Australia (like all
countries which love to tax) tries to avoid having tax treaties in force with
jurisdictions that do not levy taxes themselves. Most tax treaties were written to
reduce the problems of the same income being taxed by two countries.
Tip 111- Know the Tax Havens and the Risks of them Changing
Some places such as the Netherlands, Gibraltar, Antilles and the British Virgin
Islands have low tax rates and do not tax various sorts of foreign activities, so it was
possible to substantially reduce the total tax bill by using those treaty jurisdictions.
In recent years, as part of the crackdown on international tax planning (supported
by almost all Tax Departments and Authorities in various countries) several of these
tax treaties have been thrown out, including the ones with the Netherlands Antilles
and the British Virgin Islands. New treaties are being negotiated in most cases.
Constant review of the international tax treaties and how they change or are being
negotiated is essential or if the changes take place freezing accumulated incomes or
assets it can be detrimental to the party involved.
Tip 112- Finding Loopholes
There are still many possibilities open, however; there are countries with low tax
rates for certain types of income. Loopholes can be found in any tax law if one looks
hard enough. Simply find a low tax rate applied to a certain sort of income in one of
the many countries with a tax treaty with Australia and then structure the income
stream to produce that sort of income in that country. Once it is moved through the
tax treaty country, it can be transferred anywhere.
This area of the law can be as complicated as one wants to make it. In fact, a complex
series of transactions may work better than a simple one because the simple
loopholes have probably been plugged long ago. The multinational investor and his
tax expert must work this out carefully. In the course of a single plan, one may use
all of the techniques covered in this book and some that we have never heard of.

Tip 113- Old and New Tricks
In the good old days of income taxation, it was possible to transfer income-
producing assets to a foreign corporation or trust and let the income accumulate tax
free in some tax haven. When one wanted to bring the money back to the high tax
jurisdiction, one dissolved the corporation or had the trust make a distribution to its
beneficiaries and be liable only for capital gains. While the offshore entity existed,
one was free to borrow money from it and deduct interest paid on the loans, thus
expatriating more money. These foreign corporations or trusts were considered
beyond the jurisdiction of many countries tax codes. Governments did not look
kindly upon such transactions however, and gradually tightened the law. The
Government controlled Tax Departments and Authorities did its part by writing
pages and pages of complex, inconsistent, and incoherent regulations dealing with
foreign entities controlled by its citizens.
Some of these age old tricks may still be used provided you can find them. This is a
very complex area to navigate alone so use a competent professional.
Tip 114- Tax Avoidance and Evasion in International Tax Planning
Say UK ( as an example) like the United States of America amongst a few others is
unique among civilized nations because it taxes the income of its citizens earned
anywhere in the world. Most countries collect taxes only on income earned within
their borders. Foreign entities that do not do business in UK and are not controlled
by UK persons are not subject to UK taxes. If a UK person is found to have some
controlling interest in a foreign entity, however, he may find himself with taxable
income even though the entity has no other UK contacts.
UK taxpayers heading overseas for tax savings represent two different approaches.
One group of taxpayers intends to violate the tax laws (tax evasion) by using the
secrecy available in the tax havens and the logistical difficulties of overseas tax
investigations to hide parts of their tax and income transactions.
The other group of taxpayers wants to remain within the law. They don't mind
getting into an argument with the Tax Department or Authority but they want to
remain within the realm of arguable legality. They hope to use the varying laws of
different countries and loopholes in the complex Tax code to minimize their taxes
(tax avoidance).
Tip 115- How Legitimate Plans Become Evasion (The Need for Constant
Vigilance)
It is often very difficult for an individual to determine whether a particular

transaction is tax avoidance or tax evasion. The terms are not at all well defined and
the law governing new transaction forms is variable and imprecise. When the Tax
Department or Authority encounters unfamiliar transaction, it attempts to rule on
these actions under existing laws - created with different circumstances in mind.
The result is confusion with this year's tax shelter becoming next year's unlawful
abuse. Plus there are the many grey areas.
• Transactions that are not tax motivated and may have no income tax impact.
For example, a Australian bank may open a tax haven branch to avoid
Australian reserve requirements. Another company may use a tax haven
subsidiary to avoid currency controls or other regulations imposed by a
country that it does business with. A tax haven may be used to minimize the
risks of expropriation that accompany business activities in much of the
Third World. A foreign person may use a tax haven bank or a nominee
account to shield his assets from his political enemies.
• Transactions that are tax motivated but consistent with the letter and spirit
of the law. Some examples of these transactions are flag-of-convenience
shipping, (which avoids high registration fees), banking through subsidiaries,
(which postpones taxes on the profits from loans to foreign entities),
transactions between subsidiaries of unrelated companies that are designed
to avoid sales tax, and certain transactions that take advantage of minor
loopholes in the laws aimed at tax haven use. While some of these may create
anomalous situations, they're legal. One of the most common tax motivated
uses of a tax haven subsidiary is to change UK source income into foreign
source income. This increases the amount of foreign taxes paid by a UK
taxpayer that can be credited against, and thus reduce, UK taxes paid by the
taxpayer.
Tip 116- Further Techniques of International Tax Planning
Aggressive tax planning that takes advantage of an unintended legal or

administrative loophole. Examples include captive insurance companies, investment
companies, some service and construction businesses being conducted through tax
haven entities, and pricing of transactions. One instance of this might be the
establishment of a service business in a tax haven to provide services for another
branch of the same business located in a third country. A further example might be
the use by a multinational corporation of artificially high transfer pricing to shift
income into a tax haven. Often, the parties are aware that if the transaction were
thoroughly audited, a significant adjustment would probably be made. They rely on
the difficulties involved in overseas information gathering and on the complexity of
the transactions to avoid payment of the taxes.

Tip 117- Avoid Evasion at All Costs
Tax evasion is an action by which the taxpayer tries to escape legal obligations by
fraudulent means. This might involve simply failing to report income or trying to
create excess deductions. This category can also be broken down into two
subcategories:
(A) Evasion of tax on income that is legally earned; and,
(B) Evasion of tax on income that arises from an illegal activity such as trafficking in
narcotics.
An example of tax fraud would be the formation of sales companies that appear to
deal only with unrelated parties, but in fact deal with related parties, hiding the fact
that one owns a particular tax haven corporation. These tax haven corporations are
also used to hide corporate receipts or slush funds.
Always remain within the law and jurisdiction. Tax evasion is never a form of tax
planning. Using a competent professional is important since they can identify the
difference between tax evasion and tax avoidance and save you from much
headache in the future.

Chapter 16
Tax Avoidance and Tax Evasion
Introduction
There is a clear-cut difference between tax avoidance and tax evasion. One is legally
acceptable and the other is an offense. Unfortunately however many consultants
even in this country do not understand the difference between tax avoidance and
tax evasion. Most of the planning aspects that have been suggested by these
consultants often fall into the category of tax evasion (which is illegal) and so tends
to put clients into a risky situation and also diminish the value of tax planning.
This may be one of the prime reasons where clients have lost faith in tax planning
consultants as most of them have often suggested dubious systems which are clearly
under the category of tax evasion.
This book is not about tax evasion as a method of tax planning.
This book is all about tax planning within a legally acceptable framework which is
called tax avoidance. All the methods and the system suggested in this book are
legally acceptable. However before we embark on tax planning we need to
understand the difference between tax avoidance and tax evasion.
In this final chapter I provide some examples and case studies (including legal
cases) of how tax evasion (often suggested by consultants purporting to be
specialists in tax planning) is undertaken not only in this country but in many parts
of the world. It is true that many people do not like to pay their hard-earned money
to the government. However doing this in an illegal manner such as by tax evasion is
not the answer. Good tax planning involves tax avoidance or the reduction of the tax
incidence. If this is done properly it can save substantial amounts of money in a

legally acceptable way. This final chapter also highlights some practical examples
and case studies (including legal) of tax avoidance.
How Authorities Fight Tax Evasion
I provide a case study which is based on China the source being the internet.
Chinese film actress Liu Xiaoqing once described as a billionaire was recently
arrested on charges of dodging taxes - another example of the problem of tax
evasion by the rich. According to comments in the domestic media, China has made
big strides forward in rectifying the market economic order by prosecuting
celebrities for tax evasion.
Tax avoidance has become one of the social cancers of China. Though a group of well
known enterprises, including the Legend Computer Group and the Bank of China,
were recently cited as examples of upfront taxpayers, there were at least 200,000
enterprises in Beijing whose employees paid no individual income tax last year, an
official from the municipal taxation department has disclosed.
The evasion of enormous amounts of personal income tax has done great harm to
the country’s economy. China has always tried to create a sound social environment
which honors the honest payment of taxes and has set up new management systems
for levying taxes. Beijing Municipality, and Zhejiang and Guangdong provinces
famous as the cradles of the wealthy have all improved their management of the
collection of individual income taxes.
Beijing municipal taxation bureau will begin to monitor individuals with annual
salaries exceeding 100,000 Yuan (12,000 US dollars) in over 300,000 enterprises
from October this year. In addition, the 100 highest-paid people in each district or
county will be listed as the key individuals under supervision, including many film
or TV stars, CEOs of high tech companies and bosses of private enterprises.
Targeting high-earning self-employed and private business owners, Zhejiang
taxation department is planning to cooperate with local sectors of business
administration, public security, banking and traffic control, in a bid to prevent tax
dodging by the rich by closely scrutinizing their personal assets. Last year, Zhejiang
conducted spot-checks on over 23,000 private enterprises, retrieving individual
income tax of 950 million Yuan (USD 115million)
Nan Cunhui, board chairman of Zhengtai Group, demanded a detailed accounting of

his company’s tax payments in the last two years and encouraged senior managers
and shareholders to be aware of regulations concerning the levy of personal income
tax.
Wang Jianyi, board chairman of Hangzhou Futong Group in the provincial capital,
said, “An enterprise should shoulder social responsibilities actively for its long-term
development.” Wang has persisted in paying individual income tax in line with the
state’s standards since establishing his company. Among the 120 million yuan of
taxes paid by Futong in 2001, about 6.5 million Yuan was in personal income taxes
for the period.
South China’s Guangdong Province is setting up a sound tax monitoring system

based on computer networks with a total investment of 500 million yuan (60.5
million US dollars). Special files will be kept on high-paid individuals engaged in
financing, aviation, entertainment as well as senior business managers. The
provincial capital Guangzhou has also included more than 7,000 wealthy people in
the primary monitoring list.
Statistics from the State Administration of Taxation show that individual income tax
revenue approached 99.6 billion Yuan (12 billion US dollars) and was China’s fourth
largest category of tax last year. However, personal income tax only accounted for

6.6 percent of the whole tax revenue, far less than that of many countries with a
lower income level.
Experts believe that the newly-launched taxation measures as well as continuously

improved laws and regulations concerning tax levying will gradually overcome the
widespread evasion of personal income tax. More and more attention will be paid to
this tax category as it stands for basic personal credibility in economic activities.
Observations and Reflections on the Case Study

The effective tax management systems that are introduced and used by many of the
foreign governments are often benchmarked and used by other tax authorities. Even
though auditing of tax files of individuals and institutions have become a fairly
difficult exercise nonetheless the tax authorities will be compelled to improve their
systems and use proper intelligence( such as checking bank accounts, weddings that
take place in five-star hotels, people who spend their money in five-star hotels,
expensive buying at many of the specialty stores selling expensive merchandise,
capturing undisclosed incomes of part-time professional lectures in many of the
professional accounting courses and business studies, cost comparisons with other
records by reviewing lifestyles, monitoring high net worth individuals who may be
company chief-officers or incumbents of top managerial positions and so on) to
ferret out those who may be avoiding taxes.
In the light of the above incidences it is also realized that many governments and tax
authorities are now combining and using their intelligence and information
gathering systems in learning networks to develop much more effective control
mechanisms to bring all taxpayers and enhance effective monitoring. If this happens
and there is global support from one government to the other to fight tax evasion
this may not be the best way to save your tax dollars. It is also believed that these
government authorities of different nations who are working together in a network
system are trying to develop uniform legislation's so that even tax avoidance will
become a difficult game to play.
In this scenario however we can see that tax evasion has no future role. Even though
good tax planning to reduce the incidence of tax can also become more difficult it is
probably the only right way to save your tax dollars from going to the government.
The argument in this book is not to wait without paying taxes. The argument is to
pay the right amount and not anything more that you're legally bound to pay.
Why Governments Need Your Taxes (Basic Economic Arguments)
Income tax the biggest source of government funds today in most countries is a
comparatively recent invention, probably because the notion of annual income is
itself a modern concept. Governments preferred to tax things that were easy to
measure and on which it was thus easy to calculate the liability. This is why early
taxes concentrated on tangible items such as land and property, physical goods,
commodities and ships, as well as things such as the number of windows or
fireplaces in a building.
In the 20th century, particularly the second half, governments around the world took
a growing share of their country’s national income in tax, mainly to pay for
increasingly more expensive defense efforts and for a modern welfare state. Indirect
tax on consumption, such as value-added tax, has become increasingly important as
direct taxation on income and wealth has become increasingly unpopular.
But big differences among countries remain. One is the overall level of tax. For
example, in United States tax revenue amounts to around one-third of its GDP (gross
domestic product), whereas in Sweden it is closer to half. Others are the preferred
methods of collecting it (direct versus indirect), the rates at which it is levied and
the definition of the tax base to which these rates are applied. Countries have
different attitudes to progressive and regressive taxation. There are also big
differences in the way responsibility for taxation is divided among different levels of
government.

Arguably according to the discipline of economics any tax is a bad tax. But public
goods and other government activities have to be paid for somehow, and
economists often have strong views on which methods of taxation are more or less
efficient. Most economists agree that the best tax is one that has as little impact as
possible on people’s decisions about whether to undertake a productive economic
activity. High rates of tax on labour may discourage people from working, and so
result in lower tax revenue than there would be if the tax rate were lower, an idea
captured in the Laffer curve in economics theory. Certainly, the marginal rate of tax
may have a bigger effect on incentives than the overall tax burden.
Land tax is regarded as the most efficient by some economists and tax on
expenditure by others, as it does all the taking after the wealth creation is done.
Some economists favor a neutral tax system that does not influence the sorts of
economic activities that take place. Others favor using tax, and tax breaks, to guide
economic activity in ways they favor, such as to minimize pollution and to increase
the attractiveness of employing people rather than capital. Some economists argue
that the tax system should be characterized by both horizontal equity and vertical
equity, because this is fair, and because when the tax system is fair people may find
it harder to justify tax evasion or avoidance. However, who ultimately pays (the tax
incidence) may be different from who is initially charged, if that person can pass it
on, say by adding the tax to the price he charges for his output. Taxes on companies,
for example, are always paid in the end by humans, be they workers, customers or
shareholders.
You should note that taxation and its role in economics is a very wide subject and
this book does not address the issues of taxation and economics but rather tax
planning to improve your economic position. However if you are interested in
understanding the role of taxation in economics you should consult a good book on

economics which often talks about the impact of different types of taxation on the
economic activities of a nation of society.
Tax Avoidance and Evasion
Tax avoidance can be summed as doing everything possible within the law to reduce
your tax bill. Learned Hand, an American judge, once said that there is nothing
sinister in so arranging one’s affairs as to keep taxes as low as possible as nobody
owes any public duty to pay more than the law demands.
On the other hand tax evasion can be defined as paying less tax than you are legally
obliged to. There may be a thin line between the two, but as Denis Healey, a former
British chancellor, once put it, “The difference between tax avoidance and tax
evasion is the thickness of a prison wall.”
The courts recognize the fact that no taxpayer is obliged to arrange his/her affairs
so as to maximize the tax the government receives. Individuals and businesses are
entitled to take all lawful steps to minimize their taxes. A taxpayer may lawfully
arrange her affairs to minimize taxes by such steps as deferring income from one
year to the next. It is lawful to take all available tax deductions. It is also lawful to
avoid taxes by making charitable contributions.
Tax evasion, on the other hand, is a crime. Tax evasion typically involves failing to
report income, or improperly claiming deductions that are not authorized. Examples
of tax evasion include such actions as when a contractor “forgets” to report the
DOLLARS 1, 000,000 cash he receives for building a pool, or when a business owner
tries to deduct DOLLARS 1, 000,000 of personal expenses from his business taxes, or
when a person falsely claims she made charitable contributions, or significantly
overestimates the value of property donated to charity. Similarly, if an estate is
worth DOLLARS 5,000,000 and the executor files a false tax return, improperly
omitting property and claiming the estate is only worth DOLLARS 100,000, thus

owing much less in taxes. Tax evasion has an impact on our tax system. It causes a
significant loss of revenue to the community that could be used for funding
improvements in health, education, and other government programs.
Tax evasion also allows some businesses to gain an unfair advantage in a

competitive market and some individuals to not meet their tax obligations. As a
result, the burden of tax not paid by those who choose to evade tax falls on other
law abiding taxpayers.
Examples of tax evasion are:
Failing to declare assessable income

Claiming deductions for expenses that were not incurred or are not
legally deductible
Claiming input credits for goods that Value Added Tax (VAT)has not been
paid on
Failing to pay the PAYE (pay as you earn a form of withholding
tax)installments that have been deducted from a payment, for example
tax taken out of a worker’s wages
Failing to lodge tax returns in an attempt to avoid payment.
The following are some signs that a person or business may be evading tax:
Not being registered for VAT despite clearly exceeding the threshold
Not charging VAT at the correct rate
Not wanting to issue a receipt
Providing false invoices
Using a false business name, address, or taxpayers identification number
(TIN) and VAT registration number
Keeping two sets of accounts, and
Not providing staff with payment summaries
Legal Aspects of Tax Avoidance and Tax Evasion
Two general points can be made about tax avoidance and evasion. First, tax
avoidance or evasion occurs across the tax spectrum and is not peculiar to any tax
type such as import taxes, stamp duties, VAT, PAYE and income tax. Secondly,
legislation that addresses avoidance or evasion must necessarily be imprecise. No
prescriptive set of rules exists for determining when a particular arrangement
amounts to tax avoidance or evasion. This lack of precision creates uncertainty and
adds to compliance costs both to the Department of Inland Revenue and the tax
payer.
Definitions of Tax Mitigation Avoidance and Evasion
It is impossible to express a precise test as to whether taxpayers have avoided,

evaded or merely mitigated their tax obligations. As Baragwanath J said in Miller v
CIR; McDougall v CIR: What is legitimate ‘mitigation’(meaning avoidance) and what
is illegitimate ‘avoidance’(meaning evasion) is in the end to be decided by the
Commissioner, the Taxation Review Authority and ultimately the courts, as a matter
of judgment.
Please note in the above statement the words are precisely as stated in judgment.
However there is a mix-up of words which have been clarified by the words in the
brackets by me.
Tax Mitigation (Avoidance by Planning)
Taxpayers are entitled to mitigate their liability to tax and will not be vulnerable to
the general anti-avoidance rules in a statute. A description of tax mitigation was
given by Lord Templeman in CIR v Challenge Corporate Ltd: Income tax is mitigated

by a taxpayer who reduces his income or incurs expenditure in circumstances which
reduce his assessable income or entitle him to reduction in his tax liability. Tax
mitigation is, therefore, behavior which, without amounting to tax avoidance (by
planning), serves to attract less liability than otherwise might have arisen.
Tax Avoidance
Tax evasion, as Lord Templeman has pointed out, is not mere mitigation. The term is
described directly or indirectly by
Altering the incidence of any income tax

Relieving any person from liability to pay income tax
Avoiding, reducing or postponing any liability to income tax
On an excessively literal interpretation, this approach could conceivably apply to

mere mitigation, for example, to an individual’s decision not to work overtime,
because the additional income would attract a higher rate of tax. However, a better
way of approaching tax avoidance is to regard it as an arrangement that, unlike
mitigation, yields results that Parliament did not intend.
In Challenge Corporation Ltd v CIR, Cooke J described the effect of the general anti-
avoidance rules in these terms: [It] nullifies against the Commissioner for income
tax purposes any arrangement to the extent that it has a purpose or effect of tax
avoidance, unless that purpose or effect is merely incidental. Where an arrangement
is void the Commissioner is given power to adjust the assessable income of any
person affected by it, so as to counteract any tax advantage obtained by that person.
Woodhouse J commented on the breadth of the general anti-avoidance rule in the

Challenge Corporation case, noting that Parliament had taken: The deliberate
decision that because the problem of definition in this elusive field cannot be met by
expressly spelling out a series of detailed specifications in the statute itself, the
interstices must be left for attention by the judges.

Tax Evasion
Mitigation and avoidance are concepts concerned with whether or not a tax liability
has arisen. With evasion, the starting point is always that a liability has arisen. The
question is whether that liability has been illegitimately, even criminally been left
unsatisfied. In CIR v Challenge Corporation Ltd, Lord Templeman said: Evasion
occurs when the Commissioner is not informed of all the facts relevant to an
assessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent
evasion may lead to a criminal prosecution as well as re-assessment.
The elements which can attract the criminal label to evasion were elaborated by
Dickson J in Denver Chemical Manufacturing v Commissioner of Taxation (New
South Wales): An intention to withhold information lest the Commissioner should
consider the taxpayer liable to a greater extent than the taxpayer is prepared to
concede, is conduct which if the result is to avoid tax would justify finding evasion.
Not all evasion is fraudulent. It becomes fraudulent if it involves a deliberate

attempt to cheat the revenue. On the other hand, evasion may exist, but may not be
fraudulent, if it is the result of a genuine mistake. In order to prove the offence of
evasion, the Commissioner must show intent to evade by the taxpayer. As with other
offences, this intent may be inferred from the circumstances of the particular case.
Tax avoidance and tax mitigation are mutually exclusive. Tax avoidance and tax
evasion are not:
They may both arise out of the same situation. For example, a taxpayer files a tax
return based on the effectiveness of a transaction which is known to be void against
the Commissioner as a tax avoidance arrangement. A senior United Kingdom tax
official recently referred to this issue: If an ‘avoidance’ scheme relies on
misrepresentation, deception and concealment of the full facts, then avoidance is a
misnomer; the scheme would be more accurately described as fraud, and would fall
to be dealt with as such. Where fraud is involved, it cannot be re-characterized as

avoidance by cloaking the behavior with artificial structures, contrived transactions
and esoteric arguments as to how the tax law should be applied to the structures
and transactions.
Tax Avoidance in a Policy Framework
We now turn from the existing legal framework in the context of income tax to a
possible policy framework for considering issues relating to tax avoidance generally.
The questions considered relevant to a policy analysis of tax avoidance are:
What is tax avoidance?

Under what conditions is tax avoidance possible?
When is tax avoidance a ‘policy problem’?
What is a sensible policy response to tax avoidance?
What is the value of, and what are the limitations of, general anti-
avoidance rules?
The first two questions are discussed below
What is Tax Avoidance?
Finance literature may offer some guidance to what is meant by tax avoidance in its
definition of ‘arbitrage’. Arbitrage is a means of profiting from a mismatch in prices.
An example is finding and exploiting price differences between New Zealand and
Australia in shares in the same listed company. A real value can be found in such
arbitrage activity, since it spreads information about prices. Demand for the low-
priced goods increases and demand for the high-priced goods decreases, ensuring
that goods and resources are put to their best use. Tax arbitrage is, therefore, a form
of tax planning. It is an activity directed towards the reduction of tax.
It is this concept of tax arbitrage that seems to constitute generally accepted notions
of what is tax avoidance. Activities such as giving money to charity or investing in

tax-preferred sectors, would not fall into this definition of tax arbitrage, and thus
would not be tax avoidance even if the action were motivated by tax considerations.
It has been noted that financial arbitrage can have a useful economic function. The
same may be true of tax arbitrage, presuming that differences in taxation are
deliberate government policy furthering economic efficiency. It is possible that tax
arbitrage directs resources into activities with low tax rates, as intended by
government policy. It is also likely to ensure that investors in tax-preferred areas
are those who can benefit most from the tax concessions, namely, those facing the
highest marginal tax rates. If government policy objectives are better achieved, tax
arbitrage is in accordance with the government’s policy intent. Tax avoidance, then,
can be viewed as a form of tax arbitrage that is contrary to legislative or policy
intent.
What Makes Tax Avoidance Possible?
The basic ingredients of tax arbitrage are the notion of arbitrage, and the
possibilities of profiting from differentials that the notion of arbitrage implies. This
definition leads to the view that three conditions need to be present for tax
avoidance to exist.
A difference in the effective marginal tax rates on economic income is required. For
arbitrage to exist, there must be a price differential and, in tax arbitrage, this is a tax
differential. Such tax differences can arise because of a variable rate structure, such
as a progressive rate scale, or rate differences applying to different taxpayers, such
as tax-exempt bodies or tax loss companies.
Alternatively it can arise because the tax base is less than comprehensive, for
example, because not all economic income is subject to income tax.

• An ability to exploit the difference in tax by converting high-tax activity into low-
tax activity is required. If there are differences in tax rates, but no ability to move
from high to low-tax, no arbitrage is possible.
• Even if these two conditions are met, this does not make tax arbitrage and
avoidance possible. The tax system may mix high and low-rate taxpayers. The
high-rate taxpayer may be able to divert income to a low-rate taxpayer or
convert highly-taxed income into a lowly-taxed form. But this is pointless unless
the high-rate taxpayer can be recompensed in a lowly-taxed form for diverting
or converting his or her income into a low-tax category. The income must come
back in a low-tax form. The benefit must also exceed the transaction costs. This
is the third necessary condition for tax arbitrage.
• Since all tax systems have tax bases (The thing or amount to which a tax rate
applies. To collect income tax, for example, you need a meaningful definition of
income. Definitions of the tax base can vary enormously, over time and among
countries, especially when tax breaks are taken into account. As a result, a
country with a comparatively high tax rate may not have a high tax burden
(Total tax paid in a period as a proportion of total income in that period. It can
refer to personal, corporate or national income. ) if it has a more narrowly
defined tax base than other countries. In recent years, the political unpopularity
of high tax rates has lead many governments to lower rates and at the same time
broaden the tax base, often leaving the tax burden unchanged. )that are less than
comprehensive because of the impossibility of defining and measuring all
economic income, tax arbitrage and avoidance is inherent in tax systems.
Examples of Tax Arbitrage/Avoidance
The simplest form of arbitrage involves a family unit or a single taxpayer. If that
family unit or taxpayer faces differences in tax rates (condition 1 above), and
condition 2 above applies, then the third condition automatically holds. This
conclusion follows because people can always compensate themselves for
converting or diverting income to a low tax rate. An example of such simple tax

arbitrage involving a family unit is income splitting through, for example, the use of
family trust. An example of simple tax arbitrage involving a single taxpayer is a
straddle whereby a dealer in financial assets brings forward losses on, say shares,
and defers gains while retaining an economic interest in the shares through use of
options. Transfer pricing and thin capitalization practices through which non-
residents minimize their tax liabilities are more sophisticated examples of the same
principles.
Multi-party arbitrage is more complex; the complexity is made necessary by the

need to meet condition 3 above, that is, to ensure a net gain accrues to the high-rate
taxpayer. In the simpler cases of multi-party income tax arbitrage, this process
normally involves a tax-exempt (or tax-loss or tax-haven) entity and a taxpaying
entity. Income is diverted to the tax-exempt entity and expenses are diverted to the
taxpaying entity. Finally, the taxpaying entity is compensated for diverting income
and assuming expenses by receiving non-taxable income or a non-taxable benefit,
such as a capital gain. Over the years many have indulged in numerous examples of
such tax arbitrage using elements in the legislation at the time. Examples are finance
leasing, non-recourse lending, tax-haven(a country or designated zone that has low
or no taxes, or highly secretive banks and often a warm climate and sandy beaches,
which make it attractive to foreigners bent on tax avoidance and evasion )
‘investments’ and redeemable preference shares.
Low-tax policies pursued by some countries in the hope of attracting international

businesses and capital is called tax competition which can provide a rich ground for
arbitrage. Economists usually favour competition in any form. But some say that tax
competition is often a beggar-thy-neighbor policy, which can reduce another
country’s tax base, or force it to change its mix of taxes, or stop it taxing in the way it
would like. Economists who favour tax competition often cite a 1956 article by
Charles Tiebout (1924–68) entitled "A Pure Theory of Local Expenditures". In it he
argued that, faced with a choice of different combinations of tax and government
services, taxpayers will choose to locate where they get closest to the mixture they

want. Variations in tax rates among different countries are good, because they give
taxpayers more choice and thus more chance of being satisfied. This also puts
pressure on governments to be efficient. Thus measures to harmonize taxes are a
bad idea. There is at least one big caveat to this theory. Tiebout assumed, crucially,
that taxpayers are highly mobile and able to move to wherever their preferred
combination of taxes and benefits is on offer. Tax competition may make it harder to
redistribute from rich to poor through the tax system by allowing the rich to move
to where taxes are not redistributive.
Tactics Used by Tax Evaders
Moonlighting
Tax evasion at its simplest level merely involves staying out of the tax system
altogether. The Revenue deploys small teams of volunteer officers to carry out
surveillance to track down moonlighters. Early success was followed up by the
deployment of compliance officers in virtually every tax office. Revenue
Investigation Officers routinely scan advertisements in local newspapers or shop
windows and even before the advent of the modern personal computer they
frequently had access to reverse telephone directories to track down moonlighters
from bare telephone number details. They also study bank and other financial
institutions deposit and loans databases, customs records, and star class hotel
bookings for private functions and ceremonies to identify rich individuals who
maybe evading taxes.
Non Extractive Fraud
Alternatively it can arise because the tax base is less than comprehensive, for
example, because not all economic income is subject to income tax.
An ability to exploit the difference in tax by converting high-tax activity into

low-tax activity is required. If there are differences in tax rates, but no ability
to move from high to low-tax, no arbitrage is possible.

Even if these two conditions are met, this does not make tax arbitrage and
avoidance possible. The tax system may mix high and low-rate taxpayers.
The high-rate taxpayer may be able to divert income to a low-rate taxpayer
or convert highly-taxed income into a lowly-taxed form. But this is pointless
unless the high-rate taxpayer can be recompensed in a lowly-taxed form for
diverting or converting his or her income into a low-tax category. The income
must come back in a low-tax form. The benefit must also exceed the
transaction costs. This is the third necessary condition for tax arbitrage.
Since all tax systems have bases that are less than comprehensive because of
the impossibility of defining and measuring all economic income, tax
arbitrage and avoidance is inherent in tax systems.
This involves profit switches or timing differences, for example:
• Post dating Receipts

• Ante dating Expenditure
• Hidden Reserves
• Incorrect accounting of transactions such as showing an income as a payable.
• Stock manipulation
Perhaps the most common place method seen in practice is the manipulation of
stock to produce the desired "profit". It is not unknown for the evaders' Accountant
to be involved - putting at risk the livelihood and, if the amount involved is
significant, personal liberty! The most blatant case of this kind is where the
Accountant virtually treated this as yearend tax planning. Based upon the formal
disclosures made by the evader under the Hansard procedure to the Inland Revenue
(in which he implicated the Accountant and in connection with an account in a false
name also his Bank Manager), the following scene can be recreated:
"Studying the draft accounts the Accountant did a quick calculation to work out
what range of figures could be used for closing stock in hand without giving rise to
suspicion. He then apparently discussed with the client the impact on net profit of

reducing Closing Stock. Arrangements were then made for the audit to take place
and in the meantime some stock was moved off site! “The Accountant and Bank
Manager who assisted the evader are both guilty of conspiracy to defraud - it
matters not that they made no financial gain themselves.
Extractive Fraud
This might take the form of Suppressed receipts or inflated outgoings:
Suppressed Receipts
Typically these involve defected mainstream takings and often an

undisclosed bank account. However the more resourceful evader may take
advantage of special arrangements or unexpected receipts:
Where the proprietor or director personally deals with some customers it

may be possible for cheques to be made out in a manner which facilitates
diversion. Alternatively cheque substitution may be used, such that the
otherwise "off record sale" cheque is banked and an equivalent amount of
"on record cash" is extracted. It is not unknown for late cash payment of
credit sales to bypass the bookkeeping system with the debt subsequently
being written off as bad.
Unexpected receipts always present a good opportunity for deflection. For

example:
1. Scrap sales
2. Insurance or bad debt recoveries
3. Refunds, rebates or discounts
4. Returned goods sold for cash, disposal of fully written down assets
and windfalls in general

The evader may take advantage of a new business opportunity, which
remains hidden, and off record. Examples of this seen in practice include:
1. the dentist with three practices of which only two were discloses
2. the off record sale of hitherto obsolete car parts to the burgeoning
classic car market
Inflated Purchases & Expenses
Where the ability to deflect receipts is too difficult the evader might draw cash from
the business bank account and disguise such withdrawals as some form of
legitimate business expense. In practice this often involves the use of "ghost"
employees or fictitious outgoings to cover such extractions. Fictitious outgoings
have to employ the use of false invoices. These might take the form of altered
invoices, photocopied or even scanned "blanked" versions of genuine invoices,
completely bogus invoices or even blank invoices supplied by an associate.
Another approach seen in practice involved the use of a seemingly unconnected off
shore company to raise invoices for fictitious services. To hide the true ownership of
the off shore company the evader uses a "black hole" trust to hold the shares.
Essentially this involved a compliant non-resident trustee and "dummy" settler - the
trustee providing "stooge" directors as part of the arrangements.
Employment Tax Evasion Schemes
Employment tax evasion schemes can take a variety of forms. Some of the more
prevalent methods of evasion include pyramiding, employee leasing, paying
employees in cash, filing false payroll tax returns or failing to file payroll tax returns.
Pyramiding
"Pyramiding" of employment taxes is a fraudulent practice where a business

withholds taxes from its employees but intentionally fails to remit them to the

relevant departments. Businesses involved in pyramiding frequently file for
bankruptcy to discharge the liabilities accrued and then start a new business under
a different name and begin a new scheme.
Employment Leasing
Employee leasing is another legal business practice, which is sometimes subject to

abuse. Employee leasing is the practice of contracting with outside businesses to
handle all administrative, personnel, and payroll concerns for employees. In some
instances, employee-leasing companies fail to pay over to the authorities any
portion of the collected employment taxes. These taxes are often spent by the
owners on business or personal expenses. Often the company dissolves, leaving
millions in employment taxes unpaid.
Paying Employees in Cash
Paying employees in whole or partially in cash is a common method of evading

income and employment taxes resulting in lost tax revenue to the government and
the loss or reduction of future social benefits.
Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns
Preparing false payroll tax returns understating the amount of wages on which
taxes are owed, or failing to file employment tax returns are methods commonly
used to evade employment taxes.
Payments of Benefits
These include free benefits such as personal entertainment, excessive allowances
for foreign travel, provision of educational schemes (foreign education) to only
preferred employees, car and driver paid by company etc are simple examples.

Conclusion
I hope that in this concluding chapter I have made clear the difference between
doing things right and legitimately and in a fraudulent manner. Whether you are a
taxpayer or a consultant it is important to make sure that you understand the
nuances of good tax planning. Whilst it is understood that tax planning is becoming
more difficult and there is only a thin line between what is right and wrong it
obviously requires the expert to do the needful. However be careful not to be tricked
by those who claim to be experts in tax planning when they are mere computational
experts.
As stated before and at the beginning of this book if you are an individual you end
up paying nearly 40% of your income as taxes or if you run a company the company
ends up paying 75% of its income to the government in the form of taxes. Those
who may be able to save a high proportion of this amount by legitimate methods
will be able to enjoy the benefits of good tax planning and most importantly peace of
mind.

Consultation Support
Tax Planning consultations for individuals and corporations using the LEAST Tax
Model, a model developed by the Author through extensive research and testing and
used in a local and global context is now possible. This model is proprietary and
employed with specially developed diagnostic software plus tools and applied in
engagements globally. Thanks to the revolution and improvement in information
and communication technology the validity and predictive capabilities of this model
has been tested and proved robust amongst clients in UK, Singapore, India, Malaysia,
Australia and the United States of America.
The tax planning model helps to approach the planning process in a structured
manner. The model is called the LEAST tax model and is a holistic approach to tax
planning whatever the underlying tax system maybe. The LEAST in the above model
is an acronym for
L -life-cycle
E -economic value addition (incorporates time-value of money concept models
+ strategic planning models)
A -anticipation and forecasting (environment analysis and scanning models)
S -support (strategic allies and members of the value chains)
T -transformation (incorporates arbitrage tax model)
The basic concepts and the additional requirements of the LEAST tax model
requires knowledge on tax legislation, financial management, operations
management, international business, economics, strategic planning, marketing and
primary research capabilities but mainly the creative problem solving skills of the
tax consultant or adviser.
This model is also combined within another model originally developed by the
author to enable a complete and comprehensive tax planning assignment using the
time tested managerial process model. The steps are given below
Tax Planning Engagement Model(TEPM)

Managerial Steps Imbedded models for
process comprehensiveness
Getting started Project planning model
planning Identification of Environment analysis and scanning
planning opportunities models
Evaluation of
Decision making LEAST tax model
alternatives
Organizing Feasibility and design Decision making models
Implementation of
Control plans and related Change management models
systems

Post implementation
Control models
review and
Tax planning cycle model
maintenance
All planning tips highlighted in this book and many others are systematically
considered and alternates evaluated to provide a workable and professional report
to the client. In almost all cases the model identified over 40% savings from client’s
(usually high net-worth individuals) current tax bill over a time horizon of 5 years.
That is on average a 40% savings X 5 years is achieved which is equal to 200% of the
current tax bill.
For information regarding the use of this model and consulting support Email to
Skandak@profitmaps.com.au or visit the website www.profitmaps.com.au

Personal Tax Planning Book

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Personal Tax Planning

(Over 120 Essential and Timeless Tax Planning Ideas

© SKANDA Kumarasingam 2010 Page 1

Anne, Ramita and Sahana

© SKANDA Kumarasingam 2010 Page 2

About the Author

Chapter 1-Getting Started and Knowing the Terrain

Tip 2-Areas of Personal Tax Planning

Tip 3-Common Mistakes to Avoid

Tip 4–Knowing the Events that Trigger Tax Planning Circumstances

Tip 5– Know Important Tax Reduction/Avoidance Ideas

Tip 6- Know the Foundation of Good Tax Plans

Tip 7– Know the Value of Global Analysis in Tax Planning

Tip 8– Know the Importance of Considering All Periods in Tax Planning

Tip 9– Know the Importance of Considering All Parties in Tax Planning

Tip 13- Know the Strategic Implications of Tax Planning

Tip 14-Know the Value of Anticipating in Tax Planning

Tip 16- Know How and Why to Negotiate in Tax Planning

Tip 17-Transforming in Tax Planning

© SKANDA Kumarasingam 2010 Page 3

Tip 19-Nontaxable Benefits Derived from Employment Income

Tip 20 -Deductions from Employment Income for Commissioned Sales People

Tip 22- Am I Having Enough Withheld (PAYE Tax)?

Tip 23- Know When and How to Pay Less in Withholding

Tip 24- The Role of Allowances in Adjusting Withholding

Chapter 3-Help! I Can't Pay My Tax Liability

Tip 29-Buy Yourself Time

Tip 30- Borrow and Have a Repayment Plan

Tip 32- Negotiate an Installment Agreement with the Tax Department

Tip 33-Propose an Offer in Compromise

Tip 34- In Extreme Situations Declare Bankruptcy

© SKANDA Kumarasingam 2010 Page 4

Tip 36- Know the Triggers of an Audit

Tip 37- Types of Audits and What to Do

Tip 38- Know and Exercise Your Rights during an Audit

Tip 39- Some Crucial Things to Know and Do

Chapter 5-Tax Benefits of Home Ownership

Tip 41- The Pitfalls of Improvements and Repairs

Tip 42- Knowing How to Adjust Home Purchase Costs

Tip 43- Planning the Sale of Your Home

Chapter 6-Tax Planning for Income

Tip 45- Shifting Income to Lower Tax Brackets

Tip 46-Take All Deductions Possible at the Right Time

Tip 47- The Basics of Investment Tax Planning

Tip 48-Year End Planning

Chapter 7-Tax Planning for the Self-Employed

© SKANDA Kumarasingam 2010 Page 5

Tip 52-Understand and Comply with Your Tax Responsibilities

Tip 53- Making Your Tax Payments on Time

Tip 54- Some Methods of Reducing the Self- Employment Income

Tip 56-Tax Planning Issues with Your Retirement Savings Plans

Tip 57- Credit Proof Your Retirement Plan

Tip 59- Issues of Transforming Retirement Plans to Annuity

Tip 60 -Deduction of Business Expenses

Tip 61-Interest Expense Deductibility

Tip 62-Taxes and the Power of Personal Corporations

Chapter 8-Taxation of Investments

Tip 64- Value of Tax- Exempt and Tax Deferred Income

Tip 67- Match Capital Losses with Capital Gains

Tip 68- Plan your Investment Income and Expenses

Tip 69-Capital Gains or Ordinary Income

Tip 70-Ideas Related to Interest Expense Deductibility