Penny & Hooper confession offer 'a good deal'

By Ben Chapman-Smith

Penny and Hooper used company structures and family trusts to artificially lower their salaries to avoid a higher income tax rate. Photo / David White
Penny and Hooper used company structures and family trusts to artificially lower their salaries to avoid a higher income tax rate. Photo / David White

People who have paid themselves artificially low salaries to avoid paying the top personal tax rate should take advantage of an offer to confess while it is still on the table, says a tax expert.

The Inland Revenue Department's concession to make a voluntary disclosure - granted after the outcome of the Penny and Hooper case in 2011 - runs out at the end of this month.

Ian Penny and Gary Hooper were two Christchurch surgeons who used company structures and family trusts to artificially lower their salaries to avoid a higher personal income tax rate introduced in 2001.

The Supreme Court sided with the IRD when it ruled that "income derived from personal exertion should belong in its appropriate taxation band and should not be inappropriately diverted away".

PricewaterhouseCoopers tax partner Geof Nightingale said the IRD's concession, and subsequent decision to extend the deadline to March 31, had been a "pragmatic" approach.

"This is a good deal and if you are affected you could consider it," he said.

"Those who come forward with two years' disclosure will be able to pay it back and move forward. But once it's gone they (IRD) will go back and reassess for four years."

If someone makes a voluntary disclosure before March 31, they will only have to open up their books on the last two years filed before November 24, 2011, which was when the concession was made.

Those who do not come forward may not only face penalties but Inland Revenue may also reassess their tax position over four years.

With only two weeks remaining on the offer, accountants should be talking to any potentially affected clients, Nightingale said.

"There's a significant level of accountability on accountants to talk to their clients," he said.

Since the Supreme Court decision, the New Zealand Institute of Chartered Accountants has been running a number of courses to educate members.

"I think there's been a pretty widespread campaign to alert people to this," Nightingale said.

Most people who had made a Penny and Hooper-type arrangement would probably be aware of it anyway, Nightingale said.

"The structure of a trust is not something you could have run for you without you knowing something was happening.

"The hard thing will be for people who are not quite sure."

Anyone concerned they might be implicated should seek advice from a good accountant, Nightingale said.

As of February 28, a total of 271 taxpayers in tax positions broadly equivalent to Penny and Hooper have made voluntary disclosures.

This has resulted in nearly $7 million being collected.

The Revenue Alert regarding tax avoidance arrangements can be read here.

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