Inland Revenue today released a Revenue Alert on diverting personal services income to further refine its position on income allocation and diversion arrangements in the wake of a Court of Appeal decision.
Revenue Alerts are issued by the Commissioner of Inland Revenue to provide information about significant or emerging tax planning issues.
The Alert updates a 2008 Revenue Alert. It sets out New Zealand's taxation rules and the circumstances when Inland Revenue will consider income diversion arrangements to be tax avoidance in this context.
Group Tax Counsel, Assurance, Graham Tubb says the decision in the Penny and Hooper case is a welcome affirmation of Inland Revenue's long-held views in this area of tax planning, and lines up well with recent cases dealing with forestry structures, intellectual property rights, and structured finance arrangements.
Mr Tubb said the decision does not mean that every small business which has been incorporated, or is run through a trust is now a tax avoidance arrangement.
"To be considered avoidance, the tax effect would need to be substantial and unusual. It is a question of degree, but as is suggested by the Court, Inland Revenue should not interfere in 'marginal circumstances'. The Penny and Hooper decision confirms important criteria which, in combination, are likely to be indicative of tax avoidance and we reflect these in our updated Revenue Alert."
"These cases are not about any concept of 'market salary' (a concept which has been allowed to overtake the real debate) or telling people what they should be paid. In fact there are often legitimate reasons to retain income in the entity, for business purposes. However, where tax avoidance is found, Inland Revenue will consider if the distribution of profits is sufficient," he said.
Mr Tubb said the decision continues a long line of successful cases dating back to the 1980s and others concerning the sheltering of personal income.
Inland Revenue will continue to investigate aggressive tax planning cases similar to these as it identifies them. The Revenue Alert can be found at http://www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra1001.html