Penny v Hooper Tax Avoidance Verdict
In a unanimous decision the Supreme Court has agreed with earlier rulings that the Christchurch Orthopaedic Surgeons Ian Penny and Gary Hooper had used their company structures and Family Trusts to artificially lower their salaries and avoid paying the top personal income tax rate.
Following on from this the IRD has released their stance on this. They will generally focus on the most serious of artificial cases where the tax arrangement results in a substantial proportion of the income generated by the business being diverted away from the individuals that provided the service. They intend to examine arrangements where the total remuneration and profit distributions received by the service provider is less than 80% of the total distributions received by the controller, his or her family and any associated entities. In other words, is the income being “circulated” through the Trusts to the individual where it can still be enjoyed?
It is clear that the IRD is intending to pay particular attention to businesses that provide services.
We do not expect the floodgates to open and have all small businesses that pay remuneration to the business owners examined as the Penny v Hooper case has quite specific facts. It certainly means that more focus needs to be put on deciding the annual salary to be credited to ensure that this reflects a market rate, or if not, that there are valid economic reasons for the company not paying such a salary.
The line between what is and what is not avoidance has certainly been blurred by this decision.
