PENNY AND HOOPER

This tax case has decided that income earned from the provision of personal services should be taxed in the hands of the individual notwithstanding that the individual may be trading through a company or a trust. This is primarily aimed at high income earning professionals where their companies required no other employees and equipment to generate the income (Penny and Hooper were medical specialists).

 The Inland Revenue has since given guidance that at least 80% of such income should be taxed in the hands of the individual.

 The case has potential frightening wider application. The judges agreed that trading through the company and trust structure was entirely legal and normal but the consequent reduction in income to be taxed in the hands of the individual and the tax they paid was not envisaged by parliament.

 The implication is that any otherwise legal move that leads to a reduction in the incidence of tax is potentially avoidance unless there are other good commercial reasons for the change.

GIFTING

Gift Duty has been abolished with effect from 1 October.

 This means that donors can gift any amount they wish in a single gift. There is no longer any requirement to register the gift with the Inland Revenue, but a formal deed of gift should still be prepared and for a trust the gifting should be recorded in the trust minutes and accounts.

 However if your intention is to be able to qualify for a residential care subsidy the $27,000 per annum maximum still applies. The Ministry of Social Development “MSD” treats any gift in excess of this amount as a permanent add back to your assets when eligibility for a subsidy is assessed.

The MSD only allows a maximum of $6,000 for each of the five years prior to the application and $27,000 for all earlier years.

 Even worse! The MSD $27,000 threshold applies per application so if a couple (who have been gifting at $27,000 each per annum) apply for a subsidy for one of them then they have excess gifts between them of $27,000 per annum. (We have never yet encountered couples gifting at $13,500 per annum each despite having seen gifting documentation prepared by dozens of different firms of lawyers and accountants!)

 Our view is that the last $50,000 to $100,000 or so should not be gifted. This leaves the settlor trustee with an asset of their own as of right should they need it. (Even in situations where residential care eligibility is important this amount is below the asset threshold in most situations.)