IRD wins landmark avoidance case

Sunday 6th June 2010

Two orthopaedic surgeons who cut their salaries while boosting distributions to family trusts through their private companies immediately after the top personal income tax rate rose in 2000 have been found to have engaged in tax avoidance, in a majority Court of Appeal decision released today.

The "Penny and Hooper" case, involving Christchurch surgeons Ian Penny and Gary Hooper, is the last in a series of landmark tax cases seeking to create greater certainty about how to apply general anti-tax avoidance law.

Unless overturned by the Supreme Court, the decision marks a clean sweep for the IRD in a series of recent cases, particularly those known as "Ben Nevis" and "Glenharrow," and the pre-Christmas settlement by foreign-owned banks of avoidance arrangements that netted additional revenue for the taxpayer of $2.2 billion.

Judge Ellen France dissented, finding nothing artificial or contrived in the surgeons cutting their salaries from above $650,000 and $302,000 a year to around $120,000 following the increase in the top personal tax rate to 39% on April 1, 2000.

Their families continued to derive substantial income above those figures through dividend distributions to family trusts from the companies both men established to employ themselves as top orthopaedic surgeons in Christchurch.

IRD claimed the change allowed both surgeons to exploit the difference between the 33% company tax rate and the 39% top personal tax rate, and both Penny and Hooper agreed in court that their new salaries were not commercially realistic.

Judges Tony Randerson and Grant Hammond found against the surgeons.

"I consider it is no coincidence that the restructuring of Mr Hooper's practice occurred in 2000," said Judge Randerson, while Judge Hammond described it as a "rather obvious, indeed blatant, strategem."

The avoidance was "particularly marked in Mr Penny's case where over $2 million in company profit was diverted via his family trust to himself in the form of unsecured, interest-free loans with no specified term for repayment."

PricewaterhouseCoopers New Zealand chairman John Shewan, who was also embarrassed by evidence produced in one of the bank tax avoidance cases, copped criticism from Judge Randerson, who described "substantial parts" of his testimony on behalf of the surgeons to be "legal submission or advocacy which should have no place in the evidence of an expert witness."

For more tax news go to www.netprophet.co.nz

Businesswire.co.nz

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