TAX NEWS - 2010

New Zealand Tax: Tax avoidance case against Inland Revenue (IRD)

Almost 50 medical professionals have contributed to the war chest of two Christchurch orthopaedic surgeons fighting a landmark tax avoidance case against Inland Revenue (IRD).

Ian Penny and Gary Hooper applied for leave to appeal to the Supreme Court on Monday, following an unfavourable Court of Appeal decision last month supporting IRD's claim that the men are guilty of tax avoidance.

Yesterday, Penny said the battle had been costly for himself and Hooper but almost 50 concerned colleagues had pitched in as IRD appeared to be targeting surgeons as "scapegoats" in this case.

"A whole lot of friends and colleagues have put their hands in their pocket to help the cause because they are all potentially affected in the same way," he said.

Penny said he was not trying to get out of paying his tax but more clarity was needed around tax laws.

"None of us feel we should get out of paying fair tax, but we all feel the Government needs to make it clear what is legal."

The government should be footing his and Hooper's legal bill because it was a test case with such an overwhelming public interest aspect, he said.

He declined to comment on how much had been contributed by supporters, but said most of the cost was still being met by himself and Hooper. He had not received money from people in the broader business community.

"It's cost Gary and I a lot of money."

The Court of Appeal said IRD was entitled to pursue costs, to be fixed by the High Court, against Penny and Hooper.

The surgeons fight has been labelled a landmark test case by many tax experts, defining the extent to which people can legally reap tax benefits by funneling their income through companies and trusts.

Both Penny and Hooper set up companies, owned indirectly through trusts, to buy their own surgical services and then paid themselves a reduced salary.

After 2000, Hooper's personal income dropped from $650,000 to $120,000 and Penny's dropped from $302,000 to $125,000 and then to $100,000, while the income of their companies grew.

IRD said this "contrived" tax structure set the surgeons salaries artificially low and estimated Penny and Hooper had avoided paying personal tax of $103,000 and $65,000 respectively between 2002 and 2004.

In court, the surgeons admitted their salaries were not commercially realistic, but said the tax structures were used for legitimate commercial reasons, such as protecting themselves from medical negligence claims.