IRD targeting 500 people over low-pay dodge

File photo / NZH

The Inland Revenue Department is investigating up to 500 people it believes may have given themselves artificially low salaries to avoid paying the top personal tax rate.

Taxpayers were given a 16-month grace period in which to make a voluntary disclosure - granted after the outcome of the Penny and Hooper case in 2011 - which finished at the end of March.

About 800 people made voluntary disclosures in that time and the department was on track to recoup about $20 million in unpaid tax, said group tax counsel Graham Tubb.

The IRD had now identified up to 500 further cases which, based on intelligence, looked as though they were "prime candidates for us to make some contact with", Tubb said.

"In terms of the criteria we've used - the type of industry they're in and the type of income they're generating, what their past compliance history was like, whether or not there's been an identifiable dip in their reported personal income - they look as though they might be using the same sort of structure [as the Penny and Hooper case]."

Those people, who could expect to receive a letter from IRD shortly, had not but "probably" should have come forward during the disclosure period.

Ian Penny and Gary Hooper were two Christchurch surgeons who used company structures and family trusts to artificially lower their salaries to avoid a higher personal income tax rate introduced in 2001. The Supreme Court sided with the IRD when it ruled that "income derived from personal exertion should belong in its appropriate taxation band and should not be inappropriately diverted away".

The IRD offered the concession in November 2011, calling on people "in a similar situation to Penny and Hooper" to come forward and discuss their arrangements.

The sweetener for those who made a voluntary disclosure was they would only have to open up their books on the past two years filed before November 24, 2011, which was when the concession was made.

People who did not come forward would now not only have their tax positions reassessed over a four-year period but could also face "substantial" penalties on top, Tubb said.

Those penalties would start at 100 per cent of the tax owed but could be lightened if a person chose to "come and talk things through" with the IRD.

Tubb said the IRD had worked through about 550 of the 803 taxpayers who made confessions and only 3 per cent had been cleared as being overly cautious.

"Most people actually had something we would agree was just on the wrong side of the line in terms of aggressive tax planning. That 3 per cent have just been a little bit conservative - that's not a bad thing to do."

Tubb said that as well as retrieving tax owed, the entire operation was designed to provoke a change in attitudes towards tax compliance.

"What this exercise has been about is trying to bolster the tax rate and bolster the sort of compliance behaviour we'd like to see. We think there's been a substantial shift in approach."

He said the IRD was likely to finish assessing the 803 people by the end of July but the extra 500 cases could go on for much longer.

"If people do want to have a proper argument with us, like Mr Penny and Mr Hooper did quite legitimately, they could take quite a long time."

To read a full explanation of the Diverting personal services income by structuring revenue earning activities through an associated entity such as a trading trust or a company: