Penny & Hooper: Taxpayers lose in Supreme Court

Posted: 21st October 2011

In its judgement released last week, the Supreme Court has unanimously agreed with the Commissioner's position and has upheld the Court of Appeal decision.

The Commissioner alleged that orthopaedic surgeons, Messrs Penny & Hooper, used corporate and family trust structures in a manner that amounted to tax avoidance. The High Court disagreed, while the majority of the Court of Appeal agreed with the Commissioner.

The Supreme Court has maintained that although the structures themselves were entirely lawful and unremarkable, the use of those structures by Messrs Penny & Hooper to pay artificially low salaries amounted to tax avoidance.

For many, this judgement was not a surprise. However, it does still leave a certain degree of uncertainty hanging over taxpayers, because in the case of Messrs Penny & Hooper, although the structure itself was perfectly acceptable, the outcome was not. This has reconfirmed the need for people to be more vigilant regarding the restructuring of their affairs.

We would hope the New Zealand Institute of Chartered Accountants (NZICA) and others will lobby the IRD to reconfirm what circumstances they will and will not seek to apply this case.  The danger otherwise is that this case will be used "carte blanche" to support any position the IRD intends to take.

It is also worth noting that this case relates to tax years in which the tax rates were not aligned.  However, based on the tax rates currently in place, perhaps this case has less application moving forward given there is potentially no tax advantage. That said, in certain circumstances, there could still be timing advantages.

Should you have any queries regarding the above, please contact Martyn Henderson on (09) 308 4050 or martyn.henderson@tbag.co.nz