Tax avoiders in the gun

By Susan Edmunds

It will be harder to channel money through trust structures in the future.
It will be harder to channel money through trust structures in the future.

Inland Revenue is about to crack down on some of the country's top professionals who it feels have been avoiding tax obligations.

The department will next week send risk review letters to people it believes may have been paying themselves too little, while funnelling other income through companies and trusts.

Some accountants are surprised the department is delving back two years as it works to uncover who has been operating under so-called Penny and Hooper structures.

Ian Penny and Gary Hooper were Christchurch orthopaedic surgeons whose case went to the Supreme Court last year.

The court found they should not be allowed to funnel their income through company and trust structures to avoid the top personal tax rate.

One accountant, who did not want to be named to protect his clients' identities, said it was common practice, largely in the service industries. People would draw a salary of $70,000, even if they were a sole-trader with a company turning over hundreds of thousands of dollars a year.

Previous High Court rulings had indicated the practice was legitimate.

He said although businesspeople accepted the Supreme Court ruling, it was a surprise that the IRD was looking at past years.

"With retrospective action it's a bit scarier because it's looking at what people have done, not what they will do."

He said IRD's moves would be a concern for thousands of people. There had been a noticeable increase in the number of companies and trusts set up while the top tax rate was 39 per cent. Now they would have to prove there were commercial reasons for the way their affairs were structured.

New Zealand Institute of Chartered Accountants tax director Craig Macalister said it would mean moderate bills for most people. "In the old terminology, you're talking the difference between 33 cents and 39 cents in the dollar, and the top tax rate has come down since then."

A surgeon earning $200,000 a year who claimed a salary of $70,000 and left the rest of the income in a company or trust in the 2009/2010 year would now have to pay $7800 for the year under review and use-of-money interest on top of that.

At present, the difference is between the 33 per cent top individual tax rate, 33 per cent trust rate and 28 per cent company tax rate.

Macalister said he encouraged people to make voluntary disclosures to the IRD. If they owned up, people would not be charged shortfall penalties - the fees imposed when not enough tax is paid - but they would still have to pay use-of-money interest on top of the tax owed for the past two years.

Macalister said if they did not own up and the IRD audited them, they could face shortfall penalties as well as use-of-money interest.

Anyone who had previously earned a high income and then all of a sudden was earning $70,000 would potentially be in the spotlight.

"Our view would be that people need to seriously think about voluntary disclosure if they provide a professional service and receive substantial remuneration that flows through a series of structures and receive a modest salary."

Barrister Catherine Bibbey, who acted in the Penny and Hooper case, said at least half the surgeons in the country were operating as companies. "They may have been operating that way for 20 years."

Graham Tubb, IRD group tax counsel, said it preferred taxpayers to volunteer changes in their tax situation, but was taking a "more active approach" this month.

"We are identifying taxpayers and may be contacting them and their agents asking for additional information to determine whether adjustments are required."

- Herald on Sunday

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