IRD victory in Penny & Hooper tax case
The Inland Revenue has won its Supreme Court appeal against Christchurch orthopaedic surgeons Ian Penny and Gary Hooper.
The court found that the two surgeons should not be allowed to structure their pay with a "more than merely incidental purpose of obtaining a tax advantage unless that advantage was in the contemplation of Parliament."
One of the key issues in the case was whether the surgeons should be able to pay themselves at a much lower rate than the normal commercial rate for their kind of work.
"Parliament must have contemplated and been content that people may structure their transactions for commercial reasons or for family reasons in which any tax advantage is merely incidental, but that they will not be permitted to do so when tax avoidance is more than a merely incidental purpose or effect of the steps they have taken," the judgment, released this morning, stated.
It is thus appropriate for the Commissioner to examine whether a salary has been set at a certain level on a commercial basis or for family reasons in which the tax consequences played no more than an incidental role – whether...the fixing of the salary was fairly explicable without an inference being drawn that tax-avoidance is a purpose of the arrangement as a whole."
The Court also declared the wide-ranging general anti- avoidance provisions in the Income Tax Act is aimed at preventing any structuring of a taxpayer's affairs where that structuring is not done as part of ordinary business or family dealings unless any tax advantage is just an incidental feature.
"That must include using a company structure to fix the taxpayer’s salary in an artificial manner. The fact that many of the differences in rates which previously attracted the interest of tax planners have been removed is no basis for saying that [the anti-avoidance provisions] cannot be resorted to by the Commissioner[of Inland Revenue] in the remaining situations where there are rate differentials and a taxpayer seeks to take advantage of them by artificial means."
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Comments and questions28
Excellent decsion.
concur
Bit of an alarmist headline. The decision merely sets out the power the Commissioner has always had under the GAAP's.
Changes in a tax postion have always sparked the IRD's interest and set them on enquiry.
What has changed is that for a period of time (some would say 50 years between Peate and Hooper) the IRD hasn't always sought to apply the GAAP. This has been to the benefit of some taxpayers and the detriment of others.
The professionals advising these people lacked academia.
When giving advice in the area of tax,commercial reality is paramount.
Since the increase in the top income tax rate to 39%,and the increase in the family support entitlements,both introduced by a naive labour government,I have seen rampant amounts of agressive advice being rendered to taxpayers,predominantly centered around adopting trust and company structures.
Such advice has been promoted on the basis that "We will never be audited.''
They were trying to rort the system and in effect screw other taxpayers who paid their dues. Excellent decision and stupid headline.
should be some easy software code for the IRD to get a very long list of everyone likely caught by this.
Is this an approach that has been perpetrated widely in the medical profession?
if you want an example,I was told by a learned accountant that there were 15 to 20 IRD cases pending against a certain sector of the medical profession who went to a particular conference,and then adopted the tax avoidance mechanism for which Penny & Hooper have been caught.
Believe it or not,the area of the medical world was the same as Mr Penny and Mr Hooper were involved in.
These comment threads are a roll call of the envy ridden. Any of you actually work then? How many have ever earned enough to pay the highest rate of tax?
Speaking as a millionaire who pays his dues - actually people like this make me puke.
In a similar position (other than the millionaire bit - working really hard on that one).
I have paid the top personal tax rate for most of my life - even though I could have operated my affiars as these guys did - I choose not to - my choice. They choose a different path and are now paying - good on the IRD on this one.
interesting observation however without proper adherence law and order, including in the commercial world, anarchy prevails which is generally not a very good thing even for the high nett worth community unless you happen to have married a Kalashnikov
good decision.
Who needs surgeons anyway!
I pay my dues too. But the fault here lies with the law-makers drafting inept law. Messrs Hooper and Penny would be quite warranted sending their tax bill to that incompetent fool Cullen.
And do you really like growing the violence of the welfare state with your tax? Your money spent by over-spending idiots? I don't, and do it under sufferance. If we want to talk compassion, I can put my tax money to much better use.
3.34pm: How do you choose a market rate salary when organising your tax affairs?
i suspect the 'organising your tax affairs' bit of the question is exactly what gets one into trouble. Most people who get offered a salary of 100k to do a job do not decline and insist on only being paid 80k
Then your situation is not on all fours with Penny and Hooper at all. You are just a salary and wage earner, not a business owner in your own right. So, you could not, quote, 'have operated my affairs as these guys did'.
but as an employee you are always a salary and wage earner even if with another hat you are also director and shareholder of the employer. Why would an employee who can earn 10k working for B agree to work for 5k working for A? You only do it if you are getting another 5K or more from somewhere else aren't you?
SC judge to Doctor:
"I've got a sore knee"
Dr: It's probably a medial condyle fracture.
SC Judge: Can you fix it?.
Dr: Of course I can - put a general antiseptic on it and call me if it gets worse.
It will get worse following this decision...
Well, if the highest personal tax rate is the same as the company tax, family trust tax or whatever, such things will not happen
good decision - my heart bleeds for Penny and Hooper not one tiny little bit. They tried it on and lost. That's the legal system at work.
"Those structures were set up before there was a tax differential and the IRD goes to single business owners and says that’s OK, and then years later comes back and says no they’re not. It’s a bit tough to take" -- Garry Hooper (from other NBR article)
Does this ring true? Were the structures set up prior to the change in tax rate differential?
Anon - Yes they were.
My comment to "country is stuffed" is that there are many taxpayers,myself included,who are self-employed,and derive what would be regarded as high taxable incomes,make use of company and trust structures,but make sure that what we do cannot be attacked as tax avoidance.
In response to one of the many anonymouses above: only one of the two surgeons set up the structure before the tax change, and he didn't take an axe to his declared personal income until the change occurred. Pretty open and shut. The trouble will come at the margin.
A market salary as I see it,is what I would expect to be paid if I was working for an employer,carrying out the same duties that I am presently carrying out as a self-employed person.
In my employment position,I would have no capital invested in the business.
In my self-employed occupation I do.
Therefore an allowance needs to be made for this fact,diiferentiating the employee/employer line in the sand.
In my view the most disturbing part of the decision has nothing to do with the facts of this case. It is the statement (para. 48) that "Unless the specific rules plainly are intended to cover the field in relation to use of particular provisions by taxpayers or plainly exclude the use of the general anti-avoidance provision ...(it can be tax avoidance)". Apart from core tax provisions, most of the Tax Act is provisions that extend or limit core tax provisions and of course none of those adjusting provisions explicitly "cover the field" or explicitly exclude application of the general anti-avoidance provision. So, short of all targeted provisions having a "fit within these complex, targeted rules and it will not be tax avoidance" tag, (yeah right!) what certainty can be given to any taxpayer on any tax provision no matter how complex and specific the rules are? Some targeted provisions give some very unfair and unintended results but them's the breaks; there is no anti-unfairness provision for taxpayers to turn to. If from this decision the CIR has been given power to determine any taxpayer activity as avoidance, should not that power be balanced by the CIR being able to be challenged for unfair or unintended outcomes arising from imposition of "black letter" tax laws?
tHe question now comes as to whether Penny & hooper's professional advisors will be under the microscope.
If i had been advising Penny and Hooper,I would have strongly advised surrender at the earliest opportunity.
After all,it was a case brought by "A fair cop."