Inland Revenue has issued a Revenue Alert outlining the circumstances in which diverting personal income into other business structures or entities in order to take advantage of lower tax rates can be considered tax avoidance.
Revenue Alerts are issued by the Commissioner of Inland Revenue to provide information about significant or emerging tax planning issues.
Group Tax Counsel, Assurance, Graham Tubb, said that this Alert provides updated and expanded guidance on this issue following the recent Supreme Court decision in the Penny and Hooper case.
"The use of an incorporated business or one that is managed through a trust does not necessarily constitute tax avoidance. There are also often legitimate reasons why business owners retain a portion of the profits within the entity, such as capital expenditure, and Inland Revenue does not set a person's remuneration level."
"However, a person's income should properly reflect their contribution to a business and their tax liability should reflect their income,'' he said.
"We are focusing on cases where there are clear indicators that someone is deemed to be paying themselves an artificially low salary, and a substantial amount of their income is diverted into a structured arrangement delivering financial and tax benefits to themselves or their family."
"The indicators may involve the operating structure of a business, and whether ownership has been transferred. Other indicators may be profits distributed to other people or associated entities in an artificial or contrived manner, where the outcome of this arrangement is reduction of a person's tax liability."
Mr Tubb said income diversion arrangements can also enable people to reduce child support and student loan repayment obligations and gain Working for Families Tax Credits or student allowances benefits.
"Inland Revenue will continue to focus on more serious cases. Investigators are unlikely to review cases where at least 80% of business income was properly returned as individual income by the people who generated it from their own services.''
"We will look at all aspects of a person's income arrangement to determine whether there is a case of tax avoidance. People should contact their tax agent or advisor if they have any concerns or talk directly to Inland Revenue."
The Revenue Alert is available at http://www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra1102.html