Polson Higgs
Penny and Hooper - Tax Avoidance
The Supreme Court issued its decision on two orthopaedic surgeons on the 24 August 2011. Each surgeon separately set up their medical practice through a company owned by a family trust. Each company employed the surgeon and agreed a salary with them. The IRD challenged the level of salary and applied, what it considered, to be market salary.
The Supreme Court ruled in favour of the IRD, that the salary was set artificially low and avoided tax, although it did confirm that the business structure was valid. The effect of the low salary was to reduce the personal tax rate of 39% to 33%.
The implications of the case could be significant in that it opens the door for the Inland Revenue to determine what it considers to be a market salary for the position and adjust accordingly. While the decision is significant, taxpayers should not over-react, Peter Dunne (Minister of Revenue) has said that small businesses would not come under “intense scrutiny” as a result of the decision. This remains to be seen.
IRD will need to carefully consider the decision and how far it reaches. IRD have already said that cases of this nature, where salaries are low, are not automatically tax avoidance. A number of factors need to be considered when setting salaries including the businesses financial situation and the need for capital.
We will be watching developments in this area with interest.
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Last updated: Thursday, 25 August 2011 | 5:03:26 p.m.
