Surgeons rattle the IRD’s bones

A big cheer is likely to ring through the Eketahuna Club, when we celebrate news that taxpayers have won an important court battle against the tax gatherers.

The Independent (quoting a tax lawyer) described it as “a watershed decision” against the Inland Revenue Department in a tax avoidance case.

Other businesses are said to be preparing “to challenge the department’s dictatorial approach to tax laws.”

A senior chartered accountant, who did not wish to be named, told the newspaper the decision constituted “a huge reversal” of IRD’s powers.

“It’s essentially overturning a trend from the [Inland] Revenue to dictate the amount of remuneration that someone can be paid.”

There should be a big element of “we told you so” to the celebrations among taxpayers, because the Government was warned – when it lifted the top personal tax rate to 39%, well above the company tax rate – that the smart ones among us would find ways of getting around it by setting themselves up as companies.

(Actually, tax experts like PWC’s John Shewan and other commentators did the warning – back in the Eketahuna Club, we simply consulted our accountants and tax lawyers).

As the Independent tells it:

In a judgment made last week at the Christchurch High Court, Justice Alan Mackenzie ruled two orthopaedic surgeons had not understated their salaries to avoid tax, as claimed by the department.

At the heart of the case is the fact that the two surgeons had formed companies, and paid themselves salaries (of about $100,000 a year) out of the profits. The salaries were taxed at the domestic rate of up to 39 cents in the dollar. The rest of the profits were taxed at the then corporate rate of 33c.

The IRD said the surgeons should have paid themselves higher salaries (it calls them “commercially realistic” salaries). In this way, the percentage of their profits being taxed at the higher rate would have been increased. It calculated the surgeons owed $166,140. The surgeons disagreed, arguing they had the right to set salary levels in their business.
In the landmark decision, the surgeons won.

Defending lawyer Geoff Harley says the case shows
the need for a simplified tax regime for businesses.

Other businesses were “lined up” at the Tax Review Authority to challenge what they believed were unfair tax-avoidance allegations.

The unnamed accountant said the IRD had been “running around town” since a 2002 ruling trying to find cases to which to apply its formulation of salaries for shareholder-employees methodology.

“The way they have been applying the previous case has really pushed those boundaries to giving them almost carte blanche authority to say they can run your business or dictate the way that you run your business.

“Every time they don’t like something they turn around and they allege ‘anti-avoidance’.”

The accountant said most people faced with an anti-avoidance allegation are apt to settle because the costs of taking the case to court can be “horrific”.

He reckons the case illustrates that we’ve got a tax system unfairly pitched in favour of the tax department “simply because they’ve got the biggest chequebook.”

An IRD spokesperson told The Independent it was yet to decide whether to appeal the Christchurch decision.

But Alf says you can put your money on it. They’re a mean-minded mob, down at the IRD.

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