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."