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?
…and so the battle continues between a tax “genius” and the IRD. Since the 1980s, Mr J G Russell (Mr Russell) has been involved in legal disputes with the IRD over various schemes designed to reduce liability for income tax on companies he consulted to. The IRD claims that he owes millions of dollars in back taxes, which has since grown, with penalties and interest, to a whopping $138m. Read more
In recent times, we have seen several tax cases being lost by Taxpayers. Analysing the judgments, I believe we have seen a fundamental move when dealing with tax avoidance – a move back towards statutory interpretation. The Newton and Elmiger cases are the policy basis for our anti-avoidance rule as they focus on statutory interpretation and I believe the courts are showing a move back to this ordinary approach (as can be seen in the Banks cases).
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A word of encouragement before you discontinue your investment LAQC or make any voluntary disclosures to the IRD – make sure you consult your accountant or tax advisor and consider all the relevant facts.
It appears there has been something of an irrational and hasty response to IRD’s Revenue Alert (www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra0701.html) and related information advising of IRD’s investigation into personal homes being sold to LAQC’s.
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Fancy a free book…? Post an article or comment on a posting on TalkTax in September and you could win one of two copies of James Coleman’s new book ‘Tax Avoidance Law in New Zealand’…
Tax Avoidance
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