The Supreme Court ruled yesterday that orthopaedic surgeons Ian Penny and Gary Hooper avoided tax when they diverted income from their practices to lower tax rate entities such as companies and trusts. A significant issue was the below market salaries they paid themselves.

While it is an income tax case the Penny and Hooper decision is a reminder generally that those operating businesses through closely held entities need to pay careful attention to their tax obligations, including GST.

The Supreme Court found against the taxpayers even though the income tax legislation does not expressly state shareholders must be paid market salaries by the companies they control.

The GST legislation on the other hand does have express provisions requiring market prices to be paid when goods and services are exchanged between related parties. These provisions impact all closely held companies and trading trusts which carry on a GST taxable activity.

A GST registered company or trust which makes any of its property available to shareholders or beneficiaries is probably required to pay GST to Inland Revenue based on the market value of that property.

Similarly, a person providing services to a related Trust or Company may find they have a requirement under the GST legislation to register for GST and charge GST on the market value of the services they provide. Where the Trust or Company does not conduct a GST taxable activity [perhaps they are a residential landlord] this is a permanent GST impost.

It might be stretching the precedential value of the Supreme Court’s decision to claim it sets out principles which apply to GST. Nevertheless, it at least serves as a warning to all closely held trading entities that you need to be just as vigilant in your dealings with related parties under the GST law [and potentially more so] as you do for income tax purposes.


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