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2005 media releases

Inland Revenue cautions against income splitting by professionals
4 March 2005

Inland Revenue today warned professional and other people who are reducing their taxable income by operating through trading trusts, that the arrangements may be subject to review by the Department, and to consider taking advice.

Inland Revenue has been asked to comment on common structures which have the effect of income minimisation, involving income generated from professional or skilled services using trusts. Interest in the issue, which is not new, has been high following the Taxation Review Authority Case W33 (2004) 21 NZTC 11,321 in which the Authority held that a dentistry practice was transferred to and carried on by a 'trading' trust for tax avoidance purposes.

"Inland Revenue has always looked closely at situations where professional people conduct their business through trusts, and sometimes companies, which they or their families control," said Naomi Ferguson, Deputy Commissioner (Service Delivery). 

Ms Ferguson said it was by no means the case that every professional operating through a trust was doing so for tax reasons. But the Department had concerns that some professionals, after becoming employees of associated trusts or companies, were setting their incomes at levels considerably below what they could earn as self-employed practitioners. In these cases, some or all of the difference in income might be distributed by the trust to other family members as beneficiaries to save tax. This can result in the professional appearing to earn an unreasonably low level of income.

Ms Ferguson said: "There may be legitimate reasons for these arrangements, and we will look at each case on its own facts. It is very difficult to set down rigid rules. We do not expect a full market salary to be paid where the business is operating at a loss or is earning very little. However, where business income generated by the skills of the proprietor is at or more than a relevant market salary, we would expect at a minimum that a market salary is paid. Our view is that generally, income gained from personal skills should be taxed in the hands of the person who generates the income."

The Department would consider several factors to assess the purpose of the arrangement, including:

  • the taxpayer's commercial reasons for using the structure
  • the way that arrangements are actually implemented and operated
  • the level of salary or drawings paid compared with any previous earnings and with expected market salary rates for a person in a similar situation
  • the degree to which the business relies upon the specialist skills of the proprietor; and 
  • the overall tax impact (including income diverted to associated parties).

If taxpayers are concerned about their position, they should talk to a tax professional or call Inland Revenue on 0800 377 774.

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Corporate Communications
Inland Revenue

For all media enquiries phone: 04 890 1698

For general communications enquiries
Phone: (04) 890 1936
Email: corpcomm@ird.govt.nz
Fax: (04) 498 5809

P O Box 2198
12-22 Hawkestone Street
Wellington
New Zealand

  

Date published: 04 Mar 2005

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