IRD warns against laundering income through trading trusts

Inland Revenue today warned professionals and others who are reducing their taxable income by operating through trading trusts.

Following a ruling by the Taxation Review Authority (TRA), the department warned people to "consider taking advice" as the arrangements may be subject to review by IRD.

IRD had been asked to comment on common structures which have the effect of income minimisation, involving income generated from professional or skilled services using trusts.

It said interest in the issue, which was not new, had been rekindled following a TRA case in which the authority held that a dentistry practice was transferred to, and carried on, by a "'trading" trust for tax avoidance purposes.

"Inland Revenue has always looked closely at situations where professional people conduct their business through trusts, and sometimes companies, which they or their families control," said IRD deputy commissioner Naomi Ferguson.

Ms Ferguson said it was by no means the case that every professional operating through a trust was doing so for tax reasons but the department had concerns that some professionals, after becoming employees of associated trusts or companies, were setting their incomes at levels considerably below what they could earn as self-employed practitioners.

In these cases some, or all, of the difference in income might be distributed by the trust to other family members as beneficiaries to save tax. This can result in the professional appearing to earn an unreasonably low level of income, she said.

"There may be legitimate reasons for these arrangements, and we will look at each case on its own facts."

She said it was very difficult to set down rigid rules.

"We do not expect a full market salary to be paid where the business is operating at a loss or is earning very little.

"However, where business income generated by the skills of the proprietor is at, or more than a relevant market salary, we would expect at a minimum that a market salary is paid. Our view is that generally, income gained from personal skills should be taxed in the hands of the person who generates the income."

IRD would consider several factors to assess the purpose of the arrangement, including:

* The taxpayer's commercial reasons for using the structure.

* The way that arrangements are actually implemented and operated.

* The level of salary or drawings paid compared with any previous earnings and with expected market salary rates for a person in a similar situation.

* The degree to which the business relies upon the specialist skills of the proprietor

* The overall tax impact (including income diverted to associated parties).

- NZPA