Tax Avoidance - Don't Get Caught Out - That is if you earn as much as Drs Penny and Hooper do!

 Recently the Supreme Court released its decision in the Penny and Hooper.

To recap, the case involved two surgeons who restructured their practices into company/trust ownership and then were paid low salaries for their services.

The Supreme Court has agreed with the lower Courts that the low salaries were tax avoidance.

Some points of interest are:

* the Supreme Court considered that the structure in itself was entirely lawful and not out of the ordinary and was a choice the taxpayers were entitled to make;
* if the level of salary equalled the profit of the company there would be no tax avoidance even if the salary was not market;
* if a salary was low in a year because the company had a commercial need to retain funds for capital expenditure there would be no tax avoidance;
* if a salary was low in a year because the company was experiencing financial difficulty or it considered it reasonably may do in the future there would be no tax avoidance; but: -

* if a salary was low in a year because of tax there would be tax avoidance;
* tax avoidance was determined by the effect ? that is tax saving from a low salary;
* protection of assets from professional negligence claims cannot have been the sole or dominant purpose of the structure;
* the Supreme Court adopted an Australian case of Peate v CTCA;
* the judges accepted that the law did not require market salaries to be paid; but

* the judges considered that the law required taxpayers to not structure their affairs to obtain a tax advantage unless the tax advantage was incidental; unless
* Parliament contemplated the tax advantage (e.g. using a PIE to invest money)

There was no further explanation of what tax avoidance is and the Parliamentary contemplation test has received a glowing endorsement it seems.

Where Inland Revenue goes with the cases it has on hold and what it says in its now to be released document on tax avoidance will be interesting.