Landmark Tax Cases Head To Supreme Court

The much talked about tax fight between two Christchurch surgeons and the IRD is being appealed to the Supreme Court. The appeal by orthopaedic surgeons Ian Penny and Gary Hooper is not unexpected as the ultimate outcome of their cases could have wide implications for thousands of small businesses.

Recently the Court of Appeal ruled against Dr Penny and Dr Hooper in favour of the IRD that the business structures they had adopted amounted to tax avoidance. We reported on the details of that decision in our Tax Brief Issue 2, 2010.

The two to one majority Court of Appeal decision ruled that changing from sole traders to company and trust structures and paying below market salaries were tax avoidance arrangements designed to avoid the surgeons paying the top personal tax rate of 39% on earnings that were from personal exertion.

Dr Penny maintained that he and Dr Hooper had adopted the new structures for legitimate business purposes and that the Court of Appeal had taken a “moral stance” and had “drawn a long bow” that was not based on the law.

Dr Penny considers that if such commonly used business structures are morally repugnant then the law should be changed rather than leaving it up to the courts.

The appeal has been widely anticipated and has the support of many tax experts who believe that many businesses could be accused of tax avoidance by paying their owners salaries which IRD considers are artificially low. Experts say the concept of a market based salary is often subjective and difficult to quantify.

We await with interest the outcome of these ground breaking cases and will keep you informed of developments. In the meantime, we encourage you to contact your Polson Higgs advisor if you have any queries or concerns on this issue.



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Last updated: 19th July 2010 | 2:40 pm