Assignment task: Drew is an Australian resident taxpayer. Drew is contemplating purchasing a three-bedroom unit in Carindale for $800,000. Drew had managed to save $500,000 cash which was sitting in his Commonwealth Bank of Australia Bank account.
Drew had intended to finance the purchase of the rental property of $800,000 by using his cash savings of $500,000 and borrowing $300,000 from the bank.
However, the day before visiting his bank, one Sunday afternoon he was speaking to a friend who also owned a rental property. His friend mentioned to Drew that any interest relating to a loan taken out to finance the acquisition of an income-producing rental property is tax-deductible.
His friend mentioned to Drew that he borrowed as much as he could from his bank to finance his rental property as the interest paid on the loan was so large that he ended up deriving a net loss from his rental property which was offset against his other taxable income, leading to a large tax refund each year.
He told Drew that this strategy is called "negative gearing" and is totally legal and everyone does it. His friend suggests to Drew that he borrow as much as he can to finance the purchase of the $800,000 property at Carindale.
Drew thinks about this and the next day, Drew visits his bank and borrows $600,000 (instead of the planned $300,000) and only uses $200,000 from his $500,000 savings to purchase the Carindale rental property.
As he has borrowed more money from the bank, the interest on this loan is significantly more than he intended. As the interest is tax-deductible, Drew derives a net loss from his rental property for the year ended 30 June 2022.
This loss is included in Drew's tax return, resulting in a large tax refund.
REQUIRED:
Q1. Please explain each of the following - tax evasion, tax avoidance and tax planning.
Q2. Based on the facts in the question, has Drew engaged in tax evasion, tax planning? And reason?