Penny and Hooper V Commissioner of Inland Revenue

Penny and Hooper v Commissioner of Inland Revenue

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(2011) 25 NZTC ¶20-073

Supreme Court, SC 62/2010, [2011] NZSC 95.

Hearing: 27–29 Jun 2011; Judgment: 24 Aug 2011.

Income tax — Tax avoidance — Artificial salary level — Income allocation or diversion arrangements — Scheme and purpose of Income Tax Act — Taxpayers practising as orthopaedic surgeons — Restructuring practice arrangements — Taxpayers using combination of company and family trust structures — Different tax rates for personal, company and trust structures — Whether ordinary business or family dealings — Whether any tax advantage an incidental feature — Whether taxpayers’ salaries commercially realistic — Taxpayers suffering no actual loss of income but obtained reduction in liability to tax — Whether artificially low salary reducing each taxpayer’s earnings but enabling company’s earnings to be made available through family trusts an arrangement having tax avoidance as purpose or effect — Whether taxpayers using specific provisions of Income Tax Act in a manner which was within contemplation of Parliament — Whether arrangements had purpose or effect of tax avoidance — Whether taxpayers’ arrangements void against the Commissioner for income tax purposes — Income Tax Act 1994, ss BG 1 , GB 1 , GC 14B–GC 14E , OB 1 (“arrangement”, “tax avoidance”, “tax avoidance arrangement”) — Tax Administration Act 1994, s 138G — Income Tax and Social Services Contribution Assessment Act 1936–1960 (Cth), s 260.

This was an appeal by the taxpayers from Court of Appeal’s decision reported as C of IR v Penny and Hooper (2010) 24 NZTC 24,287.

The taxpayers practised as orthopaedic surgeons. Initially they each conducted their practice on their own account but then restructured their practice arrangements. The restructuring of Mr Hooper’s practice occurred in 2000 and that of Mr Penny’s in 1997. Each set up a company to purchase their practice. The companies were owned...