IRD Victory in Tax Avoidance Case

In its decision on 24 August 2011, the Supreme Court upheld the IRD’s allegation that two orthopaedic surgeons, Mr Penny and Mr Hooper, each committed serious tax avoidance. 

The case involved Mr Penny and Mr Hooper who each sold their medical practice to a company substantially owned by a family trust.  Each surgeon was then paid a salary from their company, but the salary was substantially less than a market salary.  The balance of the company’s net revenue was distributed to the family trust as a dividend, taxed at 33% (which was significantly lower than the top individual tax rate at the time of 39%).  The IRD claimed that this tax saving was significant (as opposed to incidental), and in the circumstances it amounted to tax avoidance. The Supreme Court agreed.

The ruling means that people who utilise company (and other structures such as family trusts) which give rise to legitimate tax advantages can, in some cases, be caught by the general anti-avoidance provisions, particularly if the structuring is not carried out as part of the ordinary business or family dealings of the individual, or if the tax benefits arising from such structuring are more than ‘incidental’.

The IRD has commented that it will be taking a measured approach in applying the decision of the Supreme Court.

For more information, or to speak with one of our trusts or company structuring specialists, call one of the experts at Davenports Harbour.