AUCKLAND TAX adviser BDO says the nation's appetite to take risks with tax planning has dramatically fallen since the Inland Revenue started scoring "big wins" in anti-avoidance cases.
High-profile successes for the taxman, including the recent $645 million BNZ and $918m Westpac cases, and the perception that courts are taking a harder line in the grey areas of tax law, has seen tax advisers and taxpayers becoming more conservative, said BDO's Iain Craig.
"The landscape is definitely quite different," he said. "The banks – sophisticated taxpayers with teams of tax experts and which pay teams of legal, accounting and tax advisers – find it difficult to get it right. It makes it even harder for the SME [small and medium enterprise] -type market to be comfortable they are getting it right."
There was also a feeling that the courts, although they may support taxpayers at lower courts, generally found for the IRD on appeal, Craig said, adding some tax experts felt the courts were simply getting the law wrong.
"The tax community doesn't hold too much hope that an appellate court will find in favour of the taxpayer."
Craig said clients were showing a marked change in attitude.
Although they wanted to hear about a whole spectrum of tax planning advice, from the very aggressive to conservative, "most people don't go for the high-risk avoidance ideas. Most people go for the middle of the road or the lower end of the risk spectrum", he said.
Craig said an emboldened IRD had become more aggressive and in disputes with taxpayers it was raising the spectre of tax avoidance earlier in discussions – an accusation that was often enough to frighten taxpayers into quick submission.
"Many people don't have the appetite or resources for an ongoing battle with the Revenue," Craig said.
Reducing tax is a common pastime among not just the very wealthy, but also in the lower ranks of the well-heeled as we have a tax system that allows people to use companies and trusts to artificially reduce their assessable incomes.
Although the bank's tax avoidance behaviour – which saw them effectively setting their own tax rates – has grabbed headlines, there is evidence of wide-scale "legitimate tax avoidance" (as Bill English described it last month) among those who own far smaller businesses.
There has been a huge increase in "trustee income" compared to "beneficiary income" on trusts which began shortly after the top tax rate was lifted to 39% (it is now 38%), indicating trusts are increasingly used to shelter a portion of the income of relatively high-earners. In 2007 alone, the IRD estimates the tax sheltering of income through trusts cost $300 million in revenue.
In addition there is an unusual spike of people declaring income of $59,000 to $60,000, suggesting people who would have been earning more have found ways to artificially reduce their assessable income. No such spike existed prior to the 1999 lifting of the top tax rate.
Treasury has also estimated the nation's $200 billion investment property holdings are generating a $200m hole in the tax take as people have geared up properties to make losses they can write off against their personal income.
But as English told a tax-planning conference: "Large-scale legitimate avoidance behaviour by higher income earners undermines the goodwill of lower income earners."
Though it has not been a chosen course of action by governments in the UK, Australia and US, the National government's medium-term aim is to align the company, trust and top personal tax rates at 30%, removing the incentive for people to dodge tax.
Aggressive tax planning was still being touted around, but Craig said those getting advice should do their own "sniff test".
"If it looks too good to be true, it probably is," he said, and the consequences of accepting such advice can be devastating.
Craig said BDO was acting for several clients who were being audited after being put into schemes they did not understand by other tax advisers.
"In many cases, taxpayers have been put into an arrangement without being aware of the risks involved."
Among the most high-risk areas of tax planning at the lower level were companies paying their owner-operators below-market wages, tax reduction that resulted in maximising Working for Families payments and the use of loss attributing qualifying companies – all current targets of the taxman's audits.
- Sunday Star Times