Monday, August 29, 2011
The New Zealand Supreme Court has dismissed an appeal by two surgeons Ian Penny and Gary Hooper, who had challenged a ruling that the use of family trusts to artificially lower their salaries was illegal tax avoidance. This is a landmark case for the Inland Revenue.
The pair, both from Christchurch, set up companies for their businesses. They paid themselves unrealistically low salaries, and the remainder of the company income went into family trusts. The trusts were then used for interest free loans, and dividends were invested in property and bank accounts.
The court heard that prior to the government increasing the top personal tax rate to 39% in 2000, the surgeons were declaring annual incomes up to NZD832,000. However, after the rate increase their incomes went down to between NZD100,000 and NZD120,000. The surgeons saved an estimated NZD90,000 in tax each over three years.
Revenue Minister Peter Dunne welcomed the news saying that the Supreme Court’s decision was correct and fair:
“It is important to the integrity of New Zealand’s tax system that everyone pays their fair share of tax,” he said.
“Businesses often use companies and trusts for legitimate reasons and this is not enough to constitute tax avoidance. However, the Court’s decision is a clear signal that people cannot structure their income arrangements in such a way that they artificially reduce their tax liability and still receive the benefits,” he added.
“The government’s move to align the trustee and top personal tax rate has delivered balance to the tax system. Through this realignment, we have not only reduced the opportunities for people to take advantage of the different rates but also any unfair advantage that such income arrangements can deliver,” said Dunne.
It is believed that the Inland Revenue Department is currently investigating a number of similar cases.