Diverting personal income
A small number of taxpayers divert their personal services income to trusts or companies, or a combination of both entities. In the case Penny & Hooper v CIR the Supreme Court upheld an earlier decision by the Court of Appeal that the defendants had diverted their personal incomes to avoid paying tax. Following the decision, the Commissioner released Revenue Alert RA 11/02 to clarify where the use of business structures to divert personal services income would raise concerns and offered a concession period should taxpayers wish to make a voluntary disclosure.
IRD received voluntary disclosures
Before the concession closed in March 2013, the Commissioner received more than 850 voluntary disclosures. A significant portion of these disclosures highlighted an income diverting structure similar to Penny & Hooper, and in some cases, further tax to pay.
IRD holds data on taxpayers who, based on the information contained within filed income tax returns, appear to utilise income-diverting structures similar to Penny & Hooper. IRD then commence audits on these taxpayers, and other taxpayers should consider whether they wish to make a voluntary disclosure before receiving an audit letter from too. In addition, taxpayers should also think carefully before setting up similar investment structures for their tax affairs.
To avoid non-compliance a structure must not inappropriately divert personal services income (or increase an individual’s entitlement to social support that they would not otherwise receive. If you think you or a client may have used inappropriate tax structures you can make a voluntary disclosure.
Let IRD know about any aggressive tax planning activities by completing an IR873 Report tax evasion or fraud anonymously form.