TalkTax

The Supreme court has today released its long-awaited decision about a landmark tax case – Penny & Hooper. The case was decided in favour of Inland Revenue and this decision has widespread implications for the many small businesses using trust structures.

The case is a classic example of taxpayers complying with the ‘black-letter’ of the law, yet not acting within the ‘scheme and purpose’ of the Income Tax Act.

This case involved the restructuring of the business of two surgeons (Penny & Hooper) from sole practitioners earning an income of approximately $500,000 per year, into a company owned by a family trust for the benefit of the surgeons and their respective families. The surgeons became employees of their companies, on salaries of approximately $120,000 per year, while the remainder of the profit from their services was retained by the companies and allocated to the trusts.

Legitimate tax planning or avoidance – what is your view?

This blog considers the likely consequences if Gift Duty were to be abolished.  The Government has recently announced that such a move is being considered.  Every practitioner should be aware of this possible shift, as it is likely to have an impact on just about every individual they advise. The Government has said that a period of consultation will be undertaken, and if Gift Duty is to be abolished, the proposal will be contained in a Bill to be released in November 2010.

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The appeal in Penny and Hooper has been decided in favour of the Commissioner in a 2:1 majority decision of the Court of Appeal released on 4 June 2010.

In the first instance the decision could be considered to have been rendered largely nugatory for the time being given the recent reduction of the top marginal rate to that of the trustee rate. However, with the new company rate now significantly below these rates, the matter of below market salaries will likely be a live issue for some time.

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John Peterson and Vicki Ammundsen join me on this first TalkTax podcast.  Hope you enjoy our thoughts on the Budget released today.  Please leave a comment below.

Click on this link to listen: Thoughts on the Budget

The transcript of the podcast is copied below:

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The recent decision in Newmarket Trustees Limited v CIR is a timely reminder of the risks inherent in the appointment of an assetless corporate trustee.  Newmarket Trustees Limited is the trustee for a number of trusts, one of which (the Southern Lights Trust) has substantial unsatisfied tax obligations.  Newmarket Trustees Limited acknowledged its liability for the tax obligations (about which it had been unaware when it accepted the appointment as trustee) but sought to have a statutory demand set aside on grounds that included the disruption to other trusts if the trustee was liquidated and the trustee’s lack of involvement in the day to day management of the debtor trust.  Declining the application the Court was critical of the trustee’s failure to meet its obligations as a trustee and the absence of any information regarding the Southern Lights Trust’s financial position. 

Although it could be hoped that this case can be limited to its facts, it would be interesting to hear readers’ views on whether the practice of using a single corporate trustee company for multiple trustee appointments is still common .

In a speech to the Tax Agents Institute conference in Greymouth last Wednesday, Revenue Minister Peter Dunne confirmed that he would push ahead with legislation on income splitting.

His prospects of success look bleak.  With marginal rate tax cuts for the wealthy already on the table for this year’s budget there is unlikely to be any money or political appetite for another middle class tax break.

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Advisors may be under the impression gifting assets to a family trust will provide some degree of protection from a means assessment for the residential care subsidy under the Social Security Act 1964.  However the level of protection is not as significant as you may initially have thought.

It is widely known that the means assessment “adds back” gifts made within 5 years of the date of assessment if the gift is in excess of 5,500 p.a.  It is perhaps less widely known that this claw back also extends to gifts made by the person’s spouse or partner.

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Intention in the context of trusts is more usually seen in the context of the three certainties. However, the recent decision in Ward v Ward [2009] NZSC 125 regarding an application under s. 182 of the Family Proceedings Act, may require looking at intention in the trust context in a whole new light.

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Trusts can provide excellent inter-generational asset protection. However, when relationships break up assets in trust solution (rightly or wrongly – I’ll leave that analysis for another day) are often taken into account. The equal sharing principle of the Property (Relationship) Act 1976 is pretty much standard modus operandi now and accordingly, or despite, many parties fail to appreciate or understand the advantages and limitations imposed when trusts are involved.

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Congratulations to Vicki Ammundsen one of TalkTax’s respected authors. Her new book ‘Taxation of Trusts’, published by CCH, is out now…

Taxation of Trusts