IRD sticking to its guns

Rob Hosking,  Sunday, 14 June 2009 14:18

Inland Revenue is sticking to its guns on the recent "income allocation arrangements" case and plans an appeal.

The department basically says the High Court got the law wrong in its recent judgement on the Penny and Hooper v Inland Revenue case.

The case's significance means it earned a mention in last week's Compliance Focus release from the department on its priorities for the coming financial year.

One of those priorities, it seems, is winning the appeal.

"We consider... the decision does not correctly reflect the law on tax avoidance and we are appealing the decision [and] the use of company and trust structures to avoid higher personal tax rates can be tax avoidance."

No date has yet been set down for appeal.

The two orthopaedic surgeons taken to court by the department operated through companies they owned and contracted as individuals to work for.  The salary they paid themselves was deemed by the department to be lower than the market rate and retaining profits within their companies  - which are taxed at 33% and more recently 30% rather than the top personal tax rate of 39% (more recently 38%).

Inland Revenue had earlier won a case against a dentist, known as the W33 case, which ruled professionals could not pay themselves below the market rate in order to pay less tax.

The department has, since the W33 case in 2003, put considerable resources into pursuit of what have been called "income diversion" activities.

The key point of the High Court decision was the conclusion the arrangement as a whole was not one with "the purpose or effect of tax avoidance, or, alternatively, if it does so, the that purpose or effect is merely incidental to the purpose of adopting the corporate form of practice."

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