OPINION: As a result of the Penny & Hooper decision Inland Revenue has conducted audits in the hope of finding non-market shareholder salaries, writes Murray McClennan in Taxing Times.

Inland Revenue has already collected more than $4 million of additional tax. I believe that a lot more back tax could be collected as effectively there is no time limit for Inland Revenue to make revised assessments where there is tax avoidance.

Inland Revenue is pushing for taxpayers to make a voluntary disclosure where artificially low salaries were paid. If a voluntary disclosure is made Inland Revenue has said that only two income years need to be disclosed. By contrast, if Inland Revenue undertakes an audit it is unlikely revised assessments would be limited to two years.

For a voluntary disclosure to be successful, and thus achieve a reduction in shortfall penalties, it must be complete and accurate. How do you determine a market salary? In my view what a locum would be expect to be paid for undertaking the role is a good starting point.

I suspect that Inland Revenue would not necessarily accept that view. In some circumstances Inland Revenue will expect up to 80 per cent of the net profit before shareholder, or trustee, remuneration to be paid as salaries.

Inland Revenue is more likely to take the view that there is tax avoidance if some or all of the following occur: The business is transferred to a company or trust, the business operates substantially as it did before the transfer. Whether there is a redistribution of income such as distributions from a trust, employment of family members, or the payment of management fees to a family controlled entity. Control still rests with the original owner(s). There is a significant reduction in tax paid and/or eligibility for income-tested benefits or subsidies.

If you feel you have a potential risk, seek appropriate advice.

» Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm.

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