David Fisher

David Fisher is a senior reporter for the NZ Herald.

Tax clamp aims at family trusts

The IRD expects to recoup about $200 million in avoided tax. Photo / APN.
The IRD expects to recoup about $200 million in avoided tax. Photo / APN.

Inland Revenue is doing audits to foil those Kiwis who misuse the system to bolster personal wealth and avoid paying tax.

The new scheme aims to foil efforts by people to pay themselves low salaries through their own companies while using family trusts to bolster wealth.

Some people have deliberately lowered the level of their salaries to qualify for Working For Families payments.

The trusts crackdown was last night estimated to be worth $200 million in avoided tax.

It is in addition to new Inland Revenue steps announced a few weeks ago to target the "hidden economy", which are expected to pull in an extra $350 million in four years.

The case began with two surgeons but tax bosses say "thousands" of Kiwis are involved in the middle New Zealand tax avoidance scheme.

The Law Commission, which is reviewing trusts law, has found the number of family trusts rose from 146,000 in 2001 to at least 237,000 in 2010.

Inland Revenue's group tax counsel Graham Tubb said its staff had travelled around the country to meet with accountants to warn "blatant" and "aggressive" tax avoidance structures would be targeted.

He said the family trust structures were a "widespread problem" used by "thousands" of people who faced higher tax bills if they didn't come forward.

Mr Tubbs said about 100 taxpayers had responded to a call to come forward and have their tax reassessed. He said about $815,000 had been pulled in from taxpayers who had volunteered to be reassessed with $25,000 pulled back in for the two-year period.

He said the lower level of assessment was the carrot - "a concession". "There's still the stick."

He said assessments by Inland Revenue on those who had not volunteered for assessment would go back four years and penalty interest of up to 100 per cent would be charged.

Mr Tubbs said Inland Revenue was carrying out audits and was planning on increasing investigations.

Letters were being sent to affected taxpayers. He said the higher 39 per cent tax rate had led to an upsurge in the tax avoidance vehicles.

The surgeons whose tax affairs led to the crackdown were orthopaedic specialists Gary Hooper and Ian Penny of Christchurch. Neither responded to calls for comment.

They took Inland Revenue to court in 2008 after it ordered them to increase the level of tax they were paying. The case went to the Supreme Court, with the judges there coming down behind Inland Revenue.

The court heard Inland Revenue claims that they had arranged to pay themselves "artificially low salaries" through the companies they used to run their business.

Inland Revenue claimed the surgeons paid other money from their companies to family trusts which meant they were able to enjoy the benefits of earning more without paying equivalent levels of tax.

Company accounts showed Mr Penny earned about $100,000 a year while Mr Hooper's company recorded paying the surgeon $120,000. Inland Revenue claimed the men should have been paid much more - an extra $400,000 for Mr Hooper and $560,000 for Mr Penny.

Court records show Mr Hooper said it would have been "commercially silly" to have accepted the $120,000 a year salary from an independent company. Mr Penny also told the court he would not have accepted the salary he paid himself from another employer.

Other money from the business was taxed at 33 cents in the dollar and paid into their family trusts. The court heard the surgeons should have been paying an extra $25,000 and $34,000 a year in tax, based on the extra 6 cents in the dollar difference between company tax rates and personal tax rates at the time.

Institute of Chartered Accountants assistant tax director Stephen Rutherford said there were still legitimate reasons for family trusts. He said trust structures which existed for the primary purpose of avoiding tax were caught.

"As long as there is a differential [tax rate] there will be people who try to exploit it. It's just human nature."

Mr Rutherford said trust structures aimed at creating salaries on the threshold of the higher tax rates would attract Inland Revenue's attention.

Accountant Susan Tremlett, who works out of Arran Chartered Accountants, said she would expect those planning on making voluntary disclosures to Inland Revenue to seek advice first.

Q&A

What is a family trust?

It is a structure which allows trustees to manage assets on behalf of a family. Those trustees can be members of the family. A trust operates on a set of rules laid out in the law but must exist for a stated purpose.

Does this decision mean it is still possible to have a family trust?

Absolutely. There are perfectly valid reasons to have a trust. This decision simply means family trusts cannot be primarily used to minimise taxes.

What can the average taxpayer do to reduce their tax payments?

Accountant Susan Tremlett says many people do not realise they can claim back tax on income protection insurance. Charitable donations can also be claimed back - as can accountants' fees.Tax dodges through family trusts are being targeted in a crackdown by Inland Revenue which involves thousands of average Kiwis.

- NZ Herald

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