What's the real purpose of your Company or Family Trust?
If it is primarily for minimising tax, the IRD may still come after you.
Over the past few years, there have been an increasing number of tax avoidance cases making their way through the Courts. In a recent case, Penny and Hooper v Commissioner of Inland Revenue, the Supreme Court ruled that the Trust arrangements constituted tax avoidance under the Income Tax Act.
The IRD took the view that the taxpayers had purposely avoided the application of the top marginal tax rate by paying themselves artificially low salaries. The case involved two surgeons whose practice was earning in excess of $500,000. The surgeons formed companies where the family trusts owned the majority of the shares. These companies then paid the surgeons salaries of $120,000 or less, which was about 18% of the prior years' earnings. These salaries were taxed at 39% (the highest marginal tax rate at the time) but the balance of each practice's income was taxed at 33% and distributed to the doctors via their family trusts.
These artificially low salaries were not justified for commercial or family reasons and tax reduction was not an incidental feature of the arrangements. The Court found that tax reduction was the main reason for the arrangement.
It should be kept in mind that this is a historical issue as there is no current tax advantage with the top personal tax rate and the trust tax rate being aligned at 33%. The IRD is prevented from going back to re-assess years that are statute barred (i.e. 2006 or earlier income years).
When you are considering arrangements that have a tax minimising effect, any tax advantages should be incidental and not the original purpose behind your arrangements.