NZICA: Implications of Penny vs Hooper case still unclear

Jenha White,  Wednesday, 23 June 2010 11:42

The full tax implications of the Penny and Hooper case are still not clear even though Inland Revenue released a Revenue Alert to clarify the situation says the New Zealand Institute of Chartered Accountants (NZICA).

NZICA tax director Craig Macalister says the confusion surrounding the tax implications of the CIR v Penny and Hooper court decision will still leave some people who provide personal services through company structures unsure of their tax liability for income.

The Revenue Alert states Inland Revenue's focus is on people who establish themselves through company and trust structures to divert income from their professional services with the objective of lowering their overall tax liability.

Inland Revenue has said it will only focus on the most serious and artificial of cases.

However, Macalister says the Revenue Alert still leaves questions.

"For example, many of the aggravating features identified by the Inland Revenue in its Revenue Alert could apply equally to tradespersons or other people who provide professional services through a company structure. We accept that, to date, the focus has been on professional people."

However, Macalister says the Revenue Alert does not distinguish between taxpayer types.

Rather it states that: 'where a service business relies mainly on an individual's personal skills to generate income, that contribution to the business should be properly reflected in the income returned by that individual - either through an appropriate salary or other taxable distributions to the individual'.

Accordingly, Inland Revenue will closely examine situations where an arrangement has the effect of diverting a substantial amount of that personal exertion income for the personal benefit of the individual or their family.

Macalister says in that context it is hard to distinguish, for example, between a medical practitioner, an electrician, a company director, or anyone that relies mainly on personal skills to generate income.

He says the NZICA accepts that, to date, Inland Revenue has not focused on such taxpayers.

"But we want this clarified to avoid any potential confusion.  We recommend that if people are in any doubt about how the Court of Appeal decision applies to them, they seek  professional tax advice," says Macalister.

written by Noel, 24 June 2010

I suggest that accountants and tax advisors apply a reasonability test when looking at structures and remuneration. In Penny & Hooper personal taxable income although derived from the same personal exertion and likely at similar annual gross income levels decreased from $500000+ in one year to less than $150000 the next simply by making a structural change. Significant dollar value changes and/or proportion changes such as in Penny & Hooper will stand out.

written by M, 24 June 2010

Maybe the folk at IRD have been watching too many World Cup matches. The refereeing there has also been inequitable and unfathomable.

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