Surgeons' tax case in Supreme Court
The typical Kiwi owner-operator business model is threatened if the IRD wins a Supreme Court case against two Christchurch orthopaedic specialists Ian Penny and Gary Hooper, said their lawyer Geoff Harley today.
The two men cut their salaries while boosting distributions to family trusts through their private companies after the top personal income tax rate rose in 2000, engaging in tax avoidance, according to a majority Court of Appeal decision released a year ago.
The pair are challenging the decision in the Supreme Court.
The landmark case has made it to the country's highest court because of its potential to drive a wedge through common tax planning devices used by small businesses and sole trading professionals such as builders, electricians and the like.
Such firms typically used a combined company and trust structure and all normally paid their owner/operators a salary lower than the market rate they would receive if employed by others, Harley told the court.
Penny and Hooper both formed trusts around the time that the top personal income tax rate rose to 39 per cent, simultaneously declaring far smaller personal incomes than in previous years, without impact on their family's circumstances since they continued to draw funds through the trust, taxed at 33 per cent.
Both surgeons cut their salaries from more than $650,000 and $300,000 a year to around $120,000.
Both Penny and Hooper agreed in court that their new salaries were not commercially realistic.
But the IRD then challenged the payments. It opens its case tomorrow.