Tax avoidance cases back on table: IRD

The Inland Revenue Department says it is "very likely" to continue existing cases against professional service providers using company structures to avoid paying high personal income taxes.

An IRD spokesman said several cases were at or near litigation stage.

The Herald understands some cases were put on hold by the IRD as it awaited the Court of Appeal's decision in the Hooper and Penny case.

"It is not expected that there will be any special increase in attention to that area," the IRD spokesperson said. "Investigators will continue to approach aggressive tax planning in their usual manner."

The department's indication follows its success in a landmark case against Christchurch orthopaedic surgeons Ian David Penny and Gary John Hooper.

That case, lodged by the IRD in the Court of Appeal following a win by the surgeons in the High Court, found their use of a company structure, with the non-payment of market salaries, amounted to tax avoidance.

Neil Russ, tax partner for law firm Buddle Findlay, said of the decision: "I think it's really swung the pendulum in favour of [the IRD] commissioner."

Pete Foley, chairman of the New Zealand Medical Association, said he was sure the two surgeons did not set out to intentionally deceive the IRD.

"These two surgeons followed the advice of their lawyers and accountants, so I think accountants and lawyers need to have a look at what advice they're passing on," Foley said.

He said doctors were taking an interest in the outcome of the Hooper and Penny case but would be more concerned if the IRD used its win "to attack the reality of medical practice in New Zealand".

"Otherwise we won't have medical practices in New Zealand," he said.

Foley pointed out that the implications of the orthopaedic surgeons' case were not restricted to doctors but to all service providers.

Russ said what constituted a "market salary" was a grey area.

"Take medical doctors - you've got public hospital rates and ... private practice rates, and those two are hugely different," he said. No "commercially realistic salary concept" existed in the Tax Act, Russ added.

Dental Association executive director David Crum said the salary ranges were also huge for dentists, making defining a market salary difficult.

"In the end, the right thing to do is to be declaring a salary that is reasonable," Crum said.

The IRD spokesman said the Court of Appeal had indicated that absolute clarity was not possible in the area of tax avoidance.

KPMG tax partner John Cantin said he had been expecting the IRD to publicly state its position in the wake of its success at the Court of Appeal.

"There are cases that [IRD] has technically stayed while this case was in place ... it's a pity they haven't come out publicly to give people some guidance," Cantin said.

The IRD spokesman said the department would issue a statement "refining its position concerning these types of cases" in the near future.

Both Russ and Cantin expected the Hooper and Penny case to be appealed in the Supreme Court.