* whether income is paid at a level that is not commensurate with skill sets or capital employed;
* whether a business operates in the same manner following the transfer to a new operating structure;
* whether a business is operated in line with the form of the arrangements entered into;
* the totality or otherwise of economic control;
* whether there is any underlying re-distribution of wealth through machanisms including related party loans;
* the non-tax reasons for the structure adopted; and
* the extent of tax benefits,

To paraphrase, if there are no profits, who would get them is not important. However, where the salary paid to a major income contributor is not a reflex of profits, there needs to be a clear basis for this that is supported by the documentation and business practise.

The inevitable conclusion is the possibility that a structure that is OK one year, may not be the next. The message I see here then is that moving forward trustees and company directors (as relevant) should be significantly more vigilant in determining annual salaries, shareholder returns and levels of distributions. Further a greater spread of decision makers and a lesser focus on individual control could be called for.

In saying this, I have to agree with all of your comments above. It appears Tax avoidance has now come down to the views of IRD of a particular transaction.

Something needs to be done to clarify Tax Avoidance arrangements to counteract this retrospective application of Tax Avoidance by the IRD.

Taxpayers deserve certainty and fairness in our Tax system.

I do hope this decision is appealed to the Supreme Court.

I have written to Commissioner a bit tongue in cheek to ask about PIE’s capped new max rate at 28% and the new top personal rate 33%

My question, If you are in the 33% tax area of income, and you take say $200k out of a Bank term deposit, and reinvest it into a Bank PIE capped at 28 % is this tax avoidance. Because based on the “look through effect” it will clearly be a tax reduction. so per Penny Hooper now tax avoidance.

If IRD say, no well its the wish of Parliament to have this distortion, then surely Penny Hooper likewise. Basically they have had 10 years to properly legislate around the extra 6%.

A possible solution
Some kind of formula, looking at the income of a company pre shareholder salaries and if the total income is more than x, say $400k then y % of x is deemed shareholder employee salaries unless already exceeded. Then all the nefarious arguments about earned personally etc vs earned by employing staff and machines are irrelevant. Firms/ people making profits from tooth fairies would be on same fitting as those making profits from selling vuvacellas. IRD only has one thing to look at and that’s the quantum of dollars. We already have definitions for closely held companies.

The governemnt should step in with clearer legislation (Not retrospective) like other countries and compel binding rulings as examples, to give certainty, guidance and rules to IRD and taxpayers, for fairness and consistency

The facts in the Ben Nevis case were so extreme that Supreme Court had little trouble in finding against the taxpayer. The arrangement was “so far across the line” that any line-drawing exercise was simply unnecessary.

The same cannot be said of the structures put in place by Penny and Hooper.

They were, on the whole, rather ordinary.

The Commissioner alleged that the “commercially unrealistic” salaries paid to the taxpayers in combination with what were otherwise unremarkable arrangements amounted to tax avoidance. Yet the Commissioner could not explain what a commercially realistic salary would be for such a family owned business and he agreed that the absence of an arm’s length salary did not, by itself, indicate that the arrangement was tax avoidance.

Here then was a case that was crying out for the Court of Appeal to articulate a principle that would separate the “avoidance arrangement” implemented by these two nefarious Christchurch surgeons from all those other ordinary arrangements put in place by other self-employed New Zealanders.

However, rather than just refusing to draw a line, as the Supreme Court had done in Ben Nevis , the Court of Appeal held that a line drawing exercise was unnecessary if not impossible.

The Majority of the Court held that tax avoidance is simply a matter of looking at the whole arrangement and making a judgement about whether the outcome is one intended by Parliament. The Majority doubted the utility, or even the possibility, of explaining the outcome by reference to any narrower principle. The carefully reasoned decision of MacKenzie J in the Court below was overturned because, taking into account all the relevant circumstances, the arrangement was unacceptable from a tax standpoint.

As vicky notes the Court acknowledged that there may be legitimate non-tax reasons for paying a taxpayer a below-market salary but left these to be tested on a case by case basis. In delivering the primary judgment for the Majority, Randerson J was conscious that his decision would lead to a certain degree of uncertainty, but he felt confident that the Commissioner would not interfere with other taxpayer’s arrangements where the circumstances were “marginal” (perhaps a little tax avoidance is alright after all).

The tone of the Majority is that they will not permit tax avoidance litigation to get bogged down in difficult questions of principle or rule making, rather these sorts of cases are to be decided in an impressionistic way by reference to an aggregate list of factors (which may or may not be relevant to deciding the next tax avoidance case).

This decision in my view sets a dangerous precedent. Having tax avoidance cases decided on their own facts might be an acceptable approach if every taxpayer came before the Courts. The reality, however, is that few taxpayers make it that far. The cost of the tax disputes procedure means that most have settled with the Commissioner or abandoned their dispute well before getting to the point where they can demand an impartial hearing.

The Commissioner is, for most taxpayers, their advisor, investigator, finder of fact, legal decision-maker and finally their debt collector.

With such a wide range of responsibilities the Courts would surely be keen to ensure the Commissioner acts within the rule of the law. Now the Court of Appeal has issued a judgment suggesting that, at least in this area of the law, there are no rules.

Also, the argument that they could have given funds to their family trusts from a higher salary is flawed – there would have been less to give due to increased tax, and gift duty would have been payable for all amounts over $27,000 p.a.

Hopefully there is a High Court appeal, which will be very interesting.

Para 121 of Randerson J’s judgement also gives pause for thought “I do not attach any weight to the suggestion that the company structure was
necessary to protect the respondents from negligence claims given the existence of the ACC legislation and the fact that a company structure would not avoid personal responsibility in respect of any such claims in any event.”

Plenty of food for thought here.