A pair of doctors who formed companies for their private practices underpaid themselves in order to avoid paying tens of thousands of dollars in tax each year, the IRD alleges.
In the Court of Appeal at Wellington today, the IRD was appealing a High Court decision in favour of the two doctors, whom it had accused of tax avoidance.
Orthopaedic surgeons Ian Penny and Gary Hooper each formed companies for their private practices and employed themselves, paying out some company profits as their own salaries with other profits directed to family trusts.
Each surgeon was paid about $100,000 a year -- well below what was commercially realistic, IRD counsel David Goddard QC told the court.
The arrangement meant the surgeons paid less tax, as the companies' profits had a tax rate of 33c, compared to the personal top tax rate of 39c.
That meant a saving of about $20,000 in tax each year.
They were able to access the remainder of profits through the company and family trust accounts, Mr Goddard said.
"They wouldn't have accepted a real pay cut of 60, 70, 80 percent ... but they accepted a 'paper' pay cut," Mr Goddard said.
The surgeons initially took the case to the High Court, arguing that income tax legislation had no notion of commercially realistic salaries.
Justice Alan Mackenzie agreed with the surgeons, saying the proprietor of a "one-man" business had the choice to run their business as a sole trader or through a company.
The IRD was appealing the High Court decision.
The case was seen as an important test case, with implications for how family and small businesses are structured for tax purposes.