As those who read this blog will know, I have put up several posts about the role of Trusts and how many people use the Trust structure to avoid paying their correct rate of tax.
Well, in Saturday’s Dominion there was an interesting article briefly outlining the case, and the decision, behind one of the more significant tax precedents of recent times (amazingly, not reported in any of the Sunday papers, but written up in the NBR. Somewhat surprisingly for a business newspaper, however, the NBR reporter missed the point and therefore got the details wrong. To be fair, so did the Dom – as I understand the case…
The precedent came from a Court of Appeal decision in the case between the IRD and 2 orthopaedic surgeons (Penny and Hooper) who, according to the IRD, had set up family trust-owned companies to avoid paying their full tax entitlement.
As posted before, the disbursements from a Trust are taxed at a final rate of 33% (unlike, for example, company dividends, which are taxed at a person’s correct marginal tax rate). These two men had set up companies that were then owned by Trusts (on advice from their lawyers and accountants…) and channelled their salaries through these entities, thus avoided paying the 39% rate, by only paying the Trust rate of 33% on the bulk of their earnings. The tax avoided between 2002 – 2004 was around $168,000.
I am not going to post all the details of the case here, but needless to say, this decision will probably go to the Supreme court due to its significance, but if it doesn’t (or it does and is up-held) it will mean that the IRD now has the legal right to pursue possibly thousands of sole traders, who have, on advice, set up their affairs under the same structure.
The new tax regime that aligns the top personal rate with the trust rate at 33%, has rendered this particular tax structuring irrelevant, however, it still gives the IRD the power to chase thousands of sole traders who had also set up trust-owned companies in the past. This, in turn, could well set in course a number of legal suits against the lawyers and accountants who provided the advice… Watch this space, but there will be a large number of very nervous business men and women out there, and, no doubt, a few professionals checking their professional indemnity insurance polices come Tuesday…
It’s good that the IRD has clarified the situation somewhat – ‘Don’t panic’ over latest tax decision says IRD
Quote: “The circumstances were most likely to relate to companies employing a single person, whose “personal exertion” was the source of the company’s income.”
I think I can breathe a sigh of relief.