IRD to appeal surgeon tax case

The IRD will today appeal a High Court decision in favour of two Christchurch surgeons it had accused of underpaying themselves in order to save on tax.

Orthopaedic surgeons Ian Penny and Gary Hooper both formed companies for their private practices and employed themselves, paying out some company profits as their own salaries.

It meant they paid less tax, as the companies' profits had a tax rate of 33c, compared to the personal top tax rate of 39c.

IRD said the structure was a tax avoidance arrangement, but the surgeons took the department to court, arguing that income tax legislation had no notion of commercially realistic salaries.

Justice Alan Mackenzie agreed with the surgeons, saying the proprietor of a "one-man" business had the choice to run their business as a sole trader or through a company.

The IRD would appeal the High Court decision in the Court of Appeal in Wellington today.

The case is seen as an important test case, with implications for how family and small businesses are structured for tax purposes.