Not surprisingly the IRD has commenced targeting CA firms and other professionals following the Penny & Hooper decisions.
The principle argument is that partners avoided the 39% tax rate by lowering their salaries and paying out profits as dividends to family trusts suffering only 33% maximum tax. In effect, CA firm partners were doing what Messrs Penny & Hooper were doing.The IRD has been auditing many CA firms. The surprising part however is their pre-conceived belief that regardless of the size of the firm, the number of staff and a host of relevant other factors, that the partners should have drawn out 80% of the profits as salaries, subject to tax at 39%.
Now it is not too hard to argue such a high percentage where there is a low number of staff to a partner, but for larger firms where a partner may have 8 or 10 staff working for them it is not logical that only 20% of the profit comes from the effort of the staff.
Penny & Hooper was about the personal earnings created by the surgeons, not their staff.In our opinion the approach being taken by the IRD is often likely to be incorrect. It is an attempt by the IRD to in effect re-litigate the Hadlee decision and in doing so to try to argue that professionals should not be able to gain an advantage by practicing through corporate structures.The basic problem is however that of those CA partners and firms targeted to date, no one has been willing to take the IRD on in a dispute and go to court.
Until this happens the IRD will keep winning, notwithstanding that it is acting akin to a school yard bully with its stand over tactics.