Inland Revenue goes to the Court of Appeal this week in a bid to overturn the landmark “Penny & Hooper” tax case. The case, against two Christchurch orthopaedic surgeons, was brought because the IRD alleged the two were paying themselves less than the going rate for their professional services, through a company and trust structure.
At issue will be just how far a structure can go to be considered “artificial or contrived” in such a way as to be deemed tax avoidance. The High Court found against the IRD last April.
How the case is determined will affect all providers of high-cost professional services who operate through company and trust structures.
However, if the IRD loses the case it appears likely the government will legislative to change the rules. The IRD’s director of tax policy, Robin Oliver, told the finance and expenditure select committee last year that the revenue impact of losing the case would be large. “We haven’t quantified it,” he told MPs. “It’s significant. It’s all about the ability for high income taxpayers to reallocate their income to companies or trusts, or companies owned by trusts, normally, and therefore reduce tax from 38% down to 30% or 33%.”
Our opinion - IRD has missed the point and are trying to "create tax confusion" in its quest to maximise the tax $ for the Government. IRD needs to explain how this structure was 'set up to avoid the top tax rate'. It was set up in the nineties when the top tax rates were exactly the same for individuals, companies and trusts.
This case is a sad example of wasted money (the public's and tax payers). Perhaps the Government and IRD would better serve by eliminating the problem with a fair and simple tax system, not clouded by retrospective technical and conflicting interpretation of the law to increase the tax $ with claims like this by IRD.
Inland Revenue should stop wasting time and money on this demeaning type of litigation.
