Two Christchurch orthopaedic surgeons who set up practices through family trusts have been granted leave to appeal a Court of Appeal finding that they used the trust structures for tax avoidance.
The appeal by Ian Penny and Gary Hooper is likely to be heard in the Supreme Court late this year or early next year.
Polson Higgs taxation partner Michael Turner welcomed the appeal to the Supreme Court but said the case meant taxpayers were funding the cost of bad tax policy introduced by the former Labour government.
"When the personal tax went to 39c in the dollar and company tax was 33c, everyone said this would happen and it did. How did a taxpayer in 2000 know what a court would decide in 2008 and 2011? I would be surprised if the Supreme Court is the final word on this."
Asked what that meant, Mr Turner said the Court of Appeal ruled that its judgement could not be taken as a blanket ruling and the court could only decide on one case at a time.
The case had to be fact specific.
"I would be surprised if the Supreme Court does not make the same statement."
That meant that other taxpayers would have to fund their cases through various courts.
Unanswered questions would remain so until the next case came along, Mr Turner said.
The Otago Daily Times understands that accountancy practices, along with other medical professionals, are funding the appeal to the Supreme Court.
Messrs Penny and Hooper initially conducted their practices on their own accounts but later set up companies to buy their practices.
The companies were owned substantially by Mr Penny's and Mr Hooper's family trusts, and the men were employed by them on what the Commissioner of Inland Revenue said were artificially low salaries.
The commissioner said the surgeons had structured the practices to avoid paying higher taxes, taking advantage of the lower company tax rate of 33c in the dollar when they should have been taxed at the higher rate of 39c, given their personal revenue.
The commissioner issued tax assessments for several income years for each of the surgeons, which they successfully appealed in the High Court at Christchurch.
A High Court judge found the business structures being used were legitimate and that doing so did not constitute tax avoidance.
But the Court of Appeal, in a two to one decision, later overturned the High Court ruling on appeal from the commissioner, with Justice Tony Randerson saying in his decision: "I have concluded that the identified arrangements in this case not only had the effect of altering the incidence of income tax ... but this was also at least one of its purposes."
The decision showed Mr Hooper's before-tax income after expenses dropped from about $650,000 in 1999 and 2000 to $120,000 for the years 2001 to 2004.
In Mr Penny's case, the company was set up in 1997, several years before the personal tax rate increase.
His salary dropped from $302,000 in 1999, to $125,000 in 2000, remaining steady at $100,000 thereafter.
Mr Turner said Mr Hooper had saved about $65,000 in tax over three years and Mr Penny had saved about $100,000.
"I can guarantee they have spent that on legal fees already. I am pleased this is being appealed. This is a significant issue for thousands of taxpayers with little bits of money at stake."
Mr Turner was concerned the IRD would "walk over" taxpayers in similar circumstances.
The cost and stress of defending $60,000 of tax avoidance would not seem worth it to some.
