IRD clarifies stance after tax-avoidance verdict

Deloitte managing tax partner Thomas Pippos said the IRD's alert reinforced his view that the Penny and Hooper case was 'fact-specific'. Photo / Supplied

The Inland Revenue Department has clarified its stance after a landmark Supreme Court decision in the so-called "Penny and Hooper" tax avoidance case last week.

Christchurch orthopaedic surgeons Ian Penny and Gary Hooper used company structures and family trusts to artificially lower their salaries and avoid paying the top personal income tax rate.

In a unanimous decision last Thursday, the Supreme Court agreed with an earlier Court of Appeal ruling that "income derived from personal exertion should belong in its appropriate taxation band and should not be inappropriately diverted away".

In an alert issued yesterday, the IRD said it would closely examine situations in which arrangements had the effect of diverting large amounts of "personal exertion income", which was still enjoyed - directly or indirectly - by the individual, or family or associates.

"We will generally focus on the most serious and artificial cases - where the arrangement results in a substantial proportion of the income generated by the business being diverted away from the individual service providers," the IRD said.

"We are more likely to examine arrangements where the total remuneration and profit distributions received by the individual service provider is less than 80 per cent of the total distributions received by the controller, his/her family and associated entities." The department said it would pay particular attention to businesses that provided services.

Deloitte managing tax partner Thomas Pippos said the IRD's alert reinforced his view that the Penny and Hooper case was "fact-specific".

"This should allay the fears some taxpayers have that the flood gates are now open in the SME sector where the payment of remuneration to business owners is varied and often not on market terms."