Implications of Penny vs Hooper case still unclear

Implications of Penny vs Hooper case still unclear

“The confusion surrounding the tax implications of the CIR v Penny and Hooper court decision will still leave some people who provide personal services through company structures unsure of their tax liability for income”, Crag Macalister, New Zealand Institute of Chartered Accountants’ tax director said today.

"We raised concerns with Inland Revenue about the ambit of the Court of Appeal decision in CIR v Penny and Hooper [2010] NZCA 289. It has released a Revenue Alert to clarify the situation, but the full tax implications are still not clear.”

“The Revenue Alert states Inland Revenue’s focus is on people who establish themselves through company and trust structures to divert income from their professional services with the objective of lowering their overall tax liability. Inland Revenue has said it will only focus on the most serious and artificial of cases”, said Mr Macalister.

However, Mr Macalister said the Revenue Alert still leaves questions. “For example, many of the aggravating features identified by the Inland Revenue in its Revenue Alert could apply equally to tradespersons or other people who provide professional services through a company structure. We accept that, to date, the focus has been on professional people.”

“However, the Revenue Alert does not distinguish between taxpayer types. Rather it states that: ‘where a service business relies mainly on an individual’s personal skills to generate income, that contribution to the business should be properly reflected in the income returned by that individual – either through an appropriate salary or other taxable distributions to the individual’. Accordingly, Inland Revenue will closely examine situations where an arrangement has the effect of diverting a substantial amount of that personal exertion income for the personal benefit of the individual or their family."

“In that context”, Mr Macalister said, “it is hard to distinguish, for example, between a medical practitioner, an electrician, a company director, or anyone that relies mainly on personal skills to generate income.”

“We accept that, to date, Inland Revenue has not focused on such taxpayers, but we want this clarified to avoid any potential confusion. We recommend that if people are in any doubt about how the Court of Appeal decision applies to them, they seek professional tax advice”, said Mr Macalister. ENDS

ENDS

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