High-earning professionals are in the gun as Inland Revenue steps up its compliance work following recent wins.
Taxpayers who use a combination of company and trust structures to minimise their tax are the focus of the activity, and tax practitioners are advising those who believe they may be caught to make a voluntary disclosure to the IRD.
The move is part of a broader effort by Inland Revenue to get the most out of the existing tax base but within the current legislative framework.
The government is promising no new major changes to the existing tax law but is ordering the IRD to step up its compliance work using the current rules.
Prime Minister John Key last week said the government would be “tightening up tax loopholes and tax avoidance”.
It is understood the IRD’s tax compliance staff have been specifically told to “go hard”.
Medical specialists, lawyers and other high-earning professionals who use a mix of company and trust structures are the main target.
“I think this was inevitable – the only surprise is how long it has taken,” Grant Thornton tax director Greg Thompson said.
“But the nervousness has been about what’s next and how far will they go?”
The rule of thumb the IRD is using is 80% – that is, if a high- earning professional who is using some combination of company and trust structure but is still declaring their own income at 80% or more of the total income, is probably going to be left alone.
Anyone declaring lower than 80% of their income and moving the rest into lower-taxed structures without good commercial reasons, is being targeted.
The IRD is encouraging taxpayers in this category to make a voluntary disclosure and promising that, if they do so, they will not face penalty payments, although taxpayers will still face use-of-money interest for the unpaid tax.
Between 50 and 100 have already come forward, Inland Revenue’s group tax counsel, Graham Tubb said. He did not have any idea of how much extra revenue the IRD was likely to gather from the stepped up activity.
The 80% rule does not mean anyone declaring a lower percentage as personal income should automatically put their hands up, New Zealand Institute of Chartered Accountants tax director Craig Macalister said.
“You should not just rush off and make a voluntary disclosure: what the Supreme Court actually said in Penny and Hooper was that [the taxpayers] were still deriving the benefit from earnings they were paying a lower rate of tax on, through other structures – basically, they were receiving the benefit of a much higher rate of salary than they were declaring.
“If you’re doing that, the chances are you should be seriously thinking about making a voluntary disclosure.
“But if you are making extra investment in your company, or if you had a bad year, it’s a different story.
“And it doesn’t have to be market value salary, which is another thing people get hung up on. What the Supreme Court was really saying was don’t set up a salary having regard to the tax benefits. If there are non-tax reasons for doing so, it will probably be seen as appropriate.”
Ernst and Young tax director Jo Doolan – who has been a frequent critic of the IRD in the past – said the taxman’s approach on this was not unreasonable, in principle, although some case managers were being more reasonable than others.
“It does seem to depend on which case manager you get. But if people feel they are being treated unfairly, if they feel they can justify paying themselves a lower rate because the money was needed in their company, they should really be elevating the argument further up the chain in the IRD.
“But if they have done something wrong, then the offer of a two-year voluntary disclosure is quite generous.”
“This has been coming for a while,” PriceWaterhouse Coopers tax partner Geof Nightingale said.
“It doesn’t take a genius to work out that, if there’s a $1 billion or more shortfalll in the tax take, the IRD is going to be told to do its best to plug that gap.”