The taxing issue of family trusts and companies

The Supreme Court has just released its judgment in the ‘Penny Hooper’ case. This case involved two doctors that worked in their own private practices. They then formed companies for which their family trusts were shareholders. Rather than the doctors receiving the full income they generated – they were paid a salary. The IRD said the salary was significantly below market value (i.e. one doctor went from $650,000 income one year to a salary of around $100,000).

The Supreme Court has said that having a salary set at a low rate to avoid paying tax is tax avoidance. However, if the salary is at a low rate for a legitimate reason (e.g. saving income for the purchase of a capital item) then this is not tax avoidance.

A more detailed summary of the decision follows and you can read the full decision here.

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