Penny and Hooper Case at the Court of Appeal
by Rob Hosking
Tax practitioners are awaiting the outcome of the Court of Appeal's deliberations on the landmark Penny and Hooper case.
At the core of the case is a taxpayer's ability to structure their affairs in such a way as to minimise tax.
The basic question is, how far is too far? If Parliament passes a series of taches to the tax regime which bring in new and different levels of tax, how far can a taxpayer go in taking advantage of those changes?
The Inland Revenue is appealing an earlier High Court decision which found in favour of Christchurch orthopaedic surgeons, Ian Penny and Gary Hooper.
That High Court ruling appeared to go against earlier rulings, especially in what have become known as the "w20" and "w33" cases, after their Taxation Review Authority number.
One of the main points of the surgeons' barrister, Geoff Harley, was that those early cases went too far.
Harley told the court that people in the position of the surgeons should be allowed to pay themselves below the commercial rate for their industry if they saw fit - if, for example, they had to invest in capital equipment or expansion for their business.
Justice Grant Hammond suggested in response that "the commissioner may not go that far" as to say that was avoidance.
"But the commissioner does go that far," Harley responded. "That's what the cases w33 and w20 are saying."
And in further exchanges between Harley and the bench, Justice Hammond observed that the question appeared to be at what point can the Inland Revenue invoke the anti-avoidance provisions contained in Section PG1 of the Income Tax Act.
"The problem with the Income Tax Act seems to be the commissioner gets it both ways," Justice Hammond said.
"Even if you come within the rules you can be dobbed by PG1...it's just a fact of life, isn't it?"
For the department, barrister David Goddard QC said the IRD is not claiming the structures used by the surgeons - who worked through a company structure and a number of family trusts - are of themselves illegitimate.
A kitchen knife is a legitimate tool, he said at one point, but it can also be used for illegal purposes.
The surgeons still retained full control and usage of the money even though it was nominally earned by the company and/or the trusts, he said.
"Usage" was more an issue than "control" - the point was made people can still control a trust but the trust can be used for, say, charitable purposes.
"The real economic consequence of mislaying more than half your income overnight are not small," he said.
"On paper this is what happened to these doctors, but of course they didn't feel that pain.
"They didn't suffer the economic reality, because the pay cut wasn't real. It was a pretence."
The court is expected to deliver its verdict some time this month.
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