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RA 21/01
29 Mar 2021

Diverting personal services income by structuring revenue earning activities through a related entity such as a trading trust or a company: the circumstances when Inland Revenue will consider this arrangement is tax avoidance

Inland Revenue has always been concerned about arrangements involving taxpayers who arrange to effectively divert to a related entity some or all of the income they earn (or could earn) from a business or activity of supplying personal services - where it has the effect of taking advantage of lower marginal income tax rates payable by that entity and/or by family members as beneficiaries or shareholders of that entity.

Other tax-linked benefits (for example child support liabilities or student loan repayment obligations and Working for Families entitlements) may also arise under the arrangement.

This Revenue Alert has been re-issued ahead of the increase in the top marginal tax rate on 1 April 2021 and reiterates the Commissioner's view on this matter which follows the Supreme Court's decision in Penny and Hooper v CIR [2011] NZSC 95.

From 1 April 2021 additional reporting obligations for trusts and new information gathering rules have been introduced to assist the Commissioner to identify, in particular, any changes or increased use of trust structures to mitigate the impact of the new tax rate. However, the Commissioner considers that the principles set out in the Penny and Hooper decision remain of general application, regardless of the particular marginal tax rates.

Tax Information Bulletin Vol 33 No 4 - May 2021

Income Tax Act 2007: BG 1, GA 1, GB 1, GB 22, GB 23, GB 27, GB 31, GB 32, GB 44

Beacham v CIR [2014] NZHC 2839, (2014) 26 NZTC 21,111
John George Russell v CIR [2012] NZCA 128, (2012) NZTC 20,120
Penny and Hooper v CIR [2011] NZSC 95, [2012] 1 NZLR 433, (2011) 25 NZTC 20,073 Ben Nevis Forestry Ventures Limited v CIR [2008] NZSC 115, [2009] 2 NZLR 289