Time running out for 'Penny & Hooper' tax dodgers

The IRD established a concession arrangement after winning the so-called "Penny and Hooper" tax avoidance case. Photo / David White

Taxpayers who dodged the top personal tax rate by paying themselves artificially low salaries have until the end of this month to confess.

The Inland Revenue Department (IRD) issued a warning today that its concession to make a voluntary disclosure - granted after the outcome of the Penny and Hooper case in 2011 - would soon run out.

"There is still time for people who are in a similar situation to Penny and Hooper and have used a similar company or trust structure to artificially lower their incomes to discuss their arrangements with Inland Revenue," said group tax counsel Graham Tubb.

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 IRD in its judgement that "income derived from personal exertion should belong in its appropriate taxation band and should not be inappropriately diverted away".

Tax lawyers and accountants have watched the case and subsequent action closely because of fears it strikes at the commonplace use of companies and trusts to organise individuals' commercial affairs.

Tubb said if a voluntary disclosure was made before March 31, the person would only be required to make adjustments for the last two income years in which Inland Revenue could reassess following Penny and Hooper.

"The two years which will be reassessed are the last two income years that the taxpayer filed before 24 November 2011, which was when the concession was made."

Tubb said those who did not come forward before March 31 may not only incur penalties but Inland Revenue may reassess their tax position over four years.

"Inland Revenue issued a Revenue Alert to outline the circumstances in which income diversion can be considered tax avoidance, following the Supreme Court's decision, because it is important that everyone operates on a level playing field," he said.

"Anyone who has concerns should contact their tax agent or advisor or talk directly to Inland Revenue."

Since October last year, another 101 taxpayers in tax positions that were broadly equivalent to Penny and Hooper had made voluntary disclosures.

That brought the total number of confessions to 271 as at February 28, 2013, Tubb said. This has resulted in nearly $7 million being collected.

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