IRD backs down from doctor's tax fight

John Peterson, Dr Philippa White’s lawyer

In what is believed to be a rare move, the Inland Revenue Department has backed away from its tax dispute with a Northland-based anaesthetist.

The decision ends nearly a decade of investigation and legal battles for Dr Philippa White, who the IRD claimed was involved in a tax avoidance arrangement.

The dispute was scheduled for a Court of Appeal hearing about now, more than two years after High Court Justice Paul Heath overturned an earlier Taxation Review Authority ruling Dr White was avoiding tax payments.

The case can be traced back to September 2002 when Dr White and her husband formed Wharfedale Ltd. The company was used to employ Dr White as an anaesthetist and to lease two avocado orchards they owned.

Orchards ran at a loss

The orchards ran at a loss in the 2003 and 2004 tax years and the losses were offset by Wharfedale’s income. As a result, Dr White earned no salary and paid no personal tax income for the five months to March 31, 2003, and for the following financial year.

The IRD audited the company and attributed additional income of $34,844 and $95,644, respectively, for the two financial years. The tax in dispute for that period amounted to $50,890.

Dr White was taken to the Taxation Review Authority as a result.

In backing away from the appeal recently, the IRD has effectively conceded the structuring arrangements in place in respect of Dr White’s private anaesthetics practice were not subject to challenge under the general anti-avoidance rule in the Income Tax Act 2007.

IRD has indicated its decision to discontinue the appeal was influenced by the August 2011 Supreme Court landmark decision in Penny & Hooper – which was released after the White appeal was filed – as well as educational and compliance initiatives the IRD has been undertaking since the release of that judgment.

That case involved two Christchurch-based orthopaedic surgeons Ian Penny and Gary Hooper and their moves to minimise their tax.

But in over-ruling the earlier Taxation Review Authority decision against Dr White, Justice Heath said:

  • Unlike Penny and Hooper, this was not a case in which a reduced salary was deliberately paid but where the company lacked the funds to pay a salary.
  • There was a realistic expectation at the time the structure was implemented there would be sufficient profit to pay a salary to the anaesthetist.
  • There is a distinction between purpose and effect, and while the effect of the arrangement was, for unforeseen reasons, to negate the need for the anaesthetist to pay income tax, the purpose was not to obtain an impermissible tax advantage.

Dr White’s lawyer, Minter Ellison partner John Peterson, says Messrs Penny and Hooper had taken their existing medical practices and put them into a company owned by their family trust and then paid themselves a salary, which the court held to be a below-market salary.

They then left the rest of the money in the company, which was taxed at a lower company rate – anywhere between 28 and 33 cents.

The reverse situation

Mr Peterson says Dr White had the reverse situation. "It turned out the orchard made all these losses – their harvest was bad and the exchange rates went the wrong way.

"Quite why the revenue got it into their head this was tax avoidance in the first place, god only knows. But once you get these guys started on a problem, they institutionalise their ideas very, very quickly and it becomes quite hard to convince them otherwise,” he told NBR ONLINE.

Mr Peterson says it is hard to find people prepared to stand up to the IRD. He says he sees a lot of taxpayers backing down because they are on “a hiding to nothing”.

He is not sure why the IRD decided to withdraw the appeal or whether the case will represent the turning of the tide in terms of tax avoidance case law in New Zealand.

“But at least in the area of domestic tax planning arrangements, this case represents a bulwark against the unrestrained exercise of the IRD’s taxing powers … this gives the tax profession a fresh opportunity to engage with crown law over the development of tax policy.”

The IRD has recently told those affected by the Penny and Hooper decision they have until March 31 next year to make voluntary disclosures.

It had previously agreed to accept settlement for those who make voluntary disclosure for a two-year period.

Since the Penny and Hooper Supreme Court decision, IRD has collected $4 million from 170 taxpayers.


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16 Comments & Questions

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There is another twist to all this which dare I say appears to be a vendetta by IRD as to those working in the medical professions, in that at what point do these people say stuff it, leave for more generous paying countries and gift those governments their tax revenue.
NZ IRD are a pack of fools and there are more problems within their ranks than out in the business world. Try and go into any branch and give them cash or a cheque...they wont accept it - real reason, their own staff cant be trusted to not nick the money.

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I think the IRD were right to challenge this arrangement and wrong to abandon the case. This is just another income splitting arrangement of a sort that has long been considered outside the contemplation of Parliament.

Perhaps its finally time for codified law in this area and to not leave it to the vagaries of the legal system.

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This case had nothing to do with income splitting. It dealt with offsetting losses against salary. It was a sensible decision by the IRD to withdraw. A finding of avoidance in this case would probably affect a similar number of people to Penny & Hooper, if not more.

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Why on earth should it not be possible for a business to have two dissimilar operating sections ?

What is wrong with a business that is part orchard and part medical profession ?

If each part is a genuine business activity why cannot it be paired with another different, genuine business activity within the same corporate, taxpaying structure ?

If both make a profit, surely IRD would accept the tax paid ?

Then why not accept the contra position when one business does not go as the operators intended ?

I find it difficult to accept any logic other than that the much deferred current position is correct.

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Individuals have always been able to offset losses from one enterprise against profits of others. It would seem that many business that used to operate as sole traders or partnerships (including accounting and law firms) now operate under a company structure in the main to manage risk better and also it is usually easier to secure finance against some assets.
The IRD were punching at shadows in this instance.

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IRD will have caused unbelievable stress to this poor Dr.
Seeing as they will now have the time and staff to look at more obvious targets, how about visiting Sanitarium who are proving to be full blown commercial predators yet pay no tax.

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Very few of the readers have been investigated and then had the IRD attack their tax interpretation.

I've had the misfortune, they are like a pack hunting their prey. Use tactics that are better suited to battle, it was a very unpleasant experience and although we won and eventually the TRA agreed and threw out tax avoidance charges. But costs of time, energy, lawyers and hard cash take your focus away from running your business.

All it takes is some petty minded bureaucrat to take a dislike to your own tax advisors interpretation and you are in for a very unpleasant ride (unless you give on).

Well done Dr White, you deserve a medal.

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The IRD investigating staff are mongrels. I know of a case where they investigated a person and pursued them for years for no reason other than they were prominent (but not wealthy). Prominent was important to the IRD because they knew a conviction would attract headlines and promote their compliance message!

The courts found the taxpayer had done no wrong - after spending close to $100k on defense costs and 3 years of economic inactivity due to the stress. The IRD just walked away of course - no skin off their nose!

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I too, have had the emminent (imminent?) men & women of the IRD ravage our businesses, all for no gain, the destruction of 3 family businesses, and the crippling of another. The effect on our health was enormous. And we were enthusiastic taxpayers working to the law.

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This approach by the IRD is arguably a direct result of the way John Key has incentivised the IRD with new KPI structures.
Its not smart business or governance. It ignores the duty of the IRD to administer the tax system appropriately.

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How on earth did John Key get into this particular debate? Boy do you have a problem!!

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Because I dont think Mr Dunne has the real power behind Revenue. I respect Mr Keys financial achievements and I assume he maintains a firm hand on revenue policy in whatever role he takes.

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$1.5 billion for the IRD's new huge IT database to track, data-mine, analyse and otherwise trawl through the every financial movement of Kiwis should solve all these problems with the upstart tax-slaves.

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IRD are out of control. 3x days with some pimply faced kid causing havoc. extra work and upset in my business and leaves at the end of it all owing me money as the audit found stuff I forgot to claim fully. Still not worth the hassle. Business is too tough here and employing staff a real hassle. Reckon it would be easier to chuck it all in and head to the GC.

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Couldnt agree more - after a 5 year audit, $100k in costs, then the IRD admitting they were wrong - Ive has a guts full of NZ's growing civil servants industry smacking the hard working Kiwis for a six.

The burden now placed on tax payers is huge - it is crushing the country!!!

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Its literally state sanctioned theft the way IRD can accuse you of something, take you to court, lose and then walk away with you having to bear the costs of your defence. How about if proven innocent, IRD carry all court costs, that way people wanting to defend themselves have a fighting chance.

Is it any wonder that after experiencing an ordeal like this with IRD, we have gone from paying our "fair share" to now have structured our affairs so that IRD now literally get sod all from us.

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