By Catherine Atchison - 15 Sep 2011
Your Family Trust may be vulnerable to the tax man
What's the real purpose of your company or family trust? If it
is primarily for minimising tax, the IRD may still come after
you.
In a recent case - Penny and Hooper v Commissioner of Inland
Revenue - the Supreme Court looked closely at the use of
companies and family trusts in relation to tax avoidance.
The Inland Revenue won its case, with the Court ruling that the
arrangements constituted tax avoidance under the Income Tax
Act.
Overview of the case
The case involved two surgeons whose practice was earning in
excess of $500,000. The surgeons formed companies to buy their
surgical practices, which then paid the surgeons salaries of
$120,000 or less.
The salaries were taxed at 39 cents in the dollar (the highest
marginal tax rate at the time). But the balance of each practice's
income was taxed at 33 cents and distributed to the doctors via
their family trusts.
Court found tax reduction was real purpose of
arrangements.
The surgeons' arrangements were definitely lawful uses of the
corporate structure under company law.
However, the artificially low salaries were not justified for
commercial or family reasons, and tax reduction was not merely an
incidental feature of the arrangements. The Court found that tax
reduction was the main reason for the arrangement.
The Lesson
When you are considering arrangements that have a tax minimising
effect, you must consider whether the purpose of an arrangement is
supported by solid non-tax reasons. These include avoiding
liability in a hazardous business or raising bank finance.
In short, any tax advantages should be incidental and not the
original purpose behind your arrangements. Tax benefits which are
not merely incidental to commercial or family purposes may leave
your tax minimising arrangement open to attack by the Inland
Revenue.
For information and advice about structuring your affairs,
contact Catherine Atchison.