IRD to appeal surgeon tax case

[CJ]

Unless the company is paying out Capital Dividends on capitals gains of property held

That only applies to QC and LAQC's. The rules for these will be changed for the next income year.

[roseneath_rat]

Other interesting observations I made on that graph-
* Note the shift upwards in the low income spikes, one would assume steady increases in unemployment benefits & government superannuation, and minimum wage.
* Very little difference in earners between 20k - 38k between years (the low/middle income battlers?)
* Large lifts in the number of middle & upper incomes across years earning $40-80k

[WGN ex-property manager]

That only applies to QC and LAQC's. The rules for these will be changed for the next income year.

Really? Did they do that in the budget ? (I missed that)

[CJ]

Really? Did they do that in the budget ? (I missed that)

QC's will be treated as partnerships so the concept of dividends goes out the window.

But I guess my post was a bit misleading - the QC regime (or whatever they rename it) will still allow capital profits to be distributed tax free.

[WGN ex-property manager]

QC's will be treated as partnerships so the concept of dividends goes out the window.

But I guess my post was a bit misleading - the QC regime (or whatever they rename it) will still allow capital profits to be distributed tax free.

OK - so capital gains can still be paid out tax free without selling the property (by raising extra debt secured on the properties). Have I got that right?

[CJ]

This also poses another question which goes a bit closer to those on this forum:

"If you have rental properties in a company or trust, do you pay yourself for property management work undertaken by you. If not it could be tax avoidance".

The same would go for Share investors:

"If you have a share portfolio in a company or trust, and it makes good returns due to your superior share trading knowledge, do you pay yourself a 'salary'. If not it could be tax avoidance".

[Perry]

IRD Wins Landmark Tax Case
Marta Steeman
24/08/2011

A Supreme Court ruling against two Christchurch surgeons confirms
people cannot structure their income to artificially lower their tax
liability, Revenue Minister Peter Dunne says. Surgeons Ian Penny and
Gary Hooper set up companies, owned indirectly through trusts, to buy
their surgical services and paid themselves artificially low salaries.

After 2000, Hooper's personal income fell from $650,000 to $120,000 a
year. Penny's dropped from $302,000 to $125,000, and then to $100,000,
while the income of their companies grew.Penny and Hooper won their
case in the High Court after Inland Revenue challenged the
''contrived'' arrangements but the High Court's decision was
overturned in the Court of Appeal in a 2-1 decision.

The surgeons then appealed to the Supreme Court, which dismissed their
case. Dunne said the court's decision was correct and fair.

I wonder what he'd've dunne if the decision had gone against IRD?
The winner always sees such determinations as right. The losers
will doubtless see it differently.

[Perry]

The most worrying part of the judgement lies in this commentary:

John Shewan of PricewaterhouseCoopers said the question was if there was a tax
advantage, was that what Parliament would have contemplated and been happy with.

Judges and courts second- or best-guessing the intention of
Parliament is dangerous, slippery-slope grounds for a finding.

That means if a citizen abides by any statute as written, s/he
can still fall foul of the law/Courts on the best- or second-
guess and possibly whimsical assessment of the judiciary/
court system, the members of which have their stipend paid
from tax revenue.

Dangerous stuff in its wider implications.

[WGN ex-property manager]

If they'd properly align company and personal tax rates then there would be no motivation to try and adjust your tax bill via company structuring, so no need for court cases like this.

[Winston001]

The most worrying part of the judgement lies in this commentary:



Judges and courts second- or best-guessing the intention of
Parliament is dangerous, slippery-slope grounds for a finding.

That means if a citizen abides by any statute as written, s/he
can still fall foul of the law/Courts on the best- or second-
guess and possibly whimsical assessment of the judiciary/
court system, the members of which have their stipend paid
from tax revenue.

Dangerous stuff in its wider implications.

An essential element of the Westminster system is the independence of the judiciary. They are not told what to do or think by politicians.

Throughout the Commonwealth judges are asked every day to interpret laws made by a Parliament. If those laws are sloppy or imprecise then the Courts have to try and make sense of them. Generally in tax cases, there is a preference for the individual up against the might of the State. Similarly with insurance companies.

When you say a citizen abides by a statute its worth remembering that another citizen may be harmed by the same statute, so Judges are left to decide what the law actually means. There used to be a prohibition on referring to Hansard because the black letter of the statute (law) should speak for itself. This has relaxed in recent years and the Courts can consider the background to legislation although ultimately they are stuck with the actual words.

[Perry]

Interpretation is one thing. Interpolation is quite another.
I agree that there has been a relaxed attitude to the law
in recent times. As my own lawyer told me: the Family
Court is the worst - they just make it up as they go along.

I've quoted excerpts before. I don't regard it as 'outdated
jurisprudence.' It merits repeating:

Lord Tomlin held: "...it is said that in [Tax] Revenue cases there is
a doctrine that the Court may ignore the legal position and regard
what is called the 'substance of the matter.' This supposed doctrine
... seems to rest its support upon a misunderstanding of language used
in some earlier cases. The sooner this misunderstanding is dispelled
and the supposed doctrine given its quietus the better it will be for
all concerned, for the doctrine seems to involve substituting 'the
uncertain and crooked cord of discretion' for 'the golden and straight
mete wand of the law'.

"Every man is entitled if he can to order his affairs so that the tax
attaching under the appropriate Acts is less than it otherwise would
be. If he succeeds in ordering them so as to secure this result, then,
however unappreciative the Commissioners of Inland Revenue or his
fellow taxpayers may be of his ingenuity, he cannot be compelled to
pay an increased tax. This so-called doctrine of 'the substance' seems
to me to be nothing more than an attempt to make a man pay
notwithstanding that he has so ordered his affairs that the amount of
tax sought from him is not legally claimable."

This approach was subsequently confirmed in New Zealand in a number of
cases such as: C of IR v Europa Oil (NZ) Ltd. , Re Securitibank Ltd
(No 2), Buckley & Young Ltd v CIR and Mills v Dowdall.

The gradual abasement of the position that Parliament makes the law,
the courts apply/interpret the law is slipping away in favour of guesswork.
I don't like it. The whole, well maybe they'dve done this if they'd brought
the subject into consideration is just plain, nasty interpolation.

[flyernzl]

From what I have gleaned from the media coverage of this case, the problem lies not with what they did but the reasons why they did it.

If they had had good reasons for the restructuring or if they had set up their ownership/payment system prior to starting work, I don't think they would have had the difficulties. They fell into the trap of reorganizing their affairs mid-stream soley to reduce their liability for taxation. If they had other reasons - reduction of liability, estate planning, pending retirement - and the tax minimization had been just a side-benefit of that reorganiztation, they would have not had the argument.

Shows the value of getting the correct structures in place prior to the income arriving.

[drelly]

Shows the value of getting the correct structures in place prior to the income arriving.

It does look like that is the reason but... why should the timing make a difference? If after a few years of using an accountant who pays no attention to reduction of liability, estate planning or retirement planning, someone starts using an accountant who suggests a new structure to attend to this, should the timing matter?

As usual, the media are also short on detail and make it sound like they didn't pay any tax.

[Winston001]

My understanding is the original structures had nothing to do with tax. I stand to be corrected but Penny and Hooper on legal and presumably accounting advice, established trusts in 1997 to own their consultancies. The intention was to protect them from professional liability in case ACC was changed to make medical people personally liable. Its been a fear for years. Furthermore there exists a narrow right to sue for exemplary damages (punishment) outside ACC which is occasionally pursued. For example, a failed sterilisation operation. The current suit against the Probation Service by the victims of the RSA killings.

The pure purpose of a trust is protection of assets. Nothing else.

It used to be that the test for tax evasion was to consider the dominant purpose of a structure but so far as I recall, the 1994 Income Tax Act broadened that. Which I'm guessing is where Penny and Hooper were caught.

Frankly whoever gave them accounting advice missed the ball. There was an earlier case of a dentist who underpaid himself (just like here) and the Commissioner's objection was upheld by the High Court. If nothing else, the Penny and Hooper decision is a good example of why a solid careful accountant and lawyer are your best friends. There are always others with clever ideas but its the client who gets prosecuted. .

[spaceman]

My understanding is that the structures used weren't the problem.

The problem was the low salary they started paying themselves........ it's pretty hard to argue that you salary is close to what it should be when it drops from $600k to $100k overnight as it were.

Cheers
Spaceman