Family Trusts in Spotlight Warning


Sole practitioners and businesses with family trusts should review their structures to ensure they do not fall foul of Inland Revenue after the landmark Penny and Hooper tax-avoidance ruling.

That’s the advice from the New Zealand Institute of Chartered Accountants (NZICA) after meeting with IRD yesterday over the Supreme Court ruling.

The Supreme Court this week upheld the ruling of the Court of Appeal that two Christchurch orthopaedic surgeons, Ian Penny and Gary Hooper, paid themselves unrealistically low salaries to avoid paying the 39 per cent tax rate.

They used company and trust structures for that purpose.

Lawyers, accountants and business advisers want IRD to say what acceptable salaries would be and where the line will be drawn between acceptable and unacceptable.

NZICA tax director Crag Macalister said it wanted more certainty from IRD over what constituted artificially low salaries.

Penny and Hooper paid themselves less than 20 per cent of the net earnings they were bringing into their practices over the three years in question in the court case, 2001-2004.

A good deal of the net revenue of the companies they set up – which employed them – went as dividends, taxed at a lower rate than the 39 per cent personal rate, to family trusts from which they and their families benefited.

Macalister said the problem was that the Penny and Hooper case was at one end of the spectrum but the institute’s members wanted guidance on where the middle point was.

It would like IRD to provide indicators of what was an acceptable and not acceptable salaries. At present there was no real hard and fast answers, he said.

The institute would work with IRD to clarify its approach , he said.

“I think there will be a lot of people reviewing current arrangements to get themselves comfortable that what they have in place will be acceptable going forward.”