Crackdown finds mass tax avoidance

PUBLISHED : Thursday, 05 September, 1996, 12:00am
UPDATED : Thursday, 05 September, 1996, 12:00am

An Inland Revenue Department (IRD) crackdown on schemes using service companies to avoid tax has uncovered thousands of cases of questionable use of such vehicles throughout the professional services sector, sources say.

Professional partnerships in areas as diverse as accounting, surveying, law and medicine have been the primary focus of the IRD.

The disputed schemes have been noted in service companies established by people at all levels, from managing partner figures at major professional firms to low-level staff at small offices.

Despite the increased scrutiny of professional firms, senior IRD officials harbour concerns that misuse of service companies may return once legislation allowing the formal incorporation of accounting and legal firms is implemented.

The legislation was introduced last year to capture tax avoidance by executives, but increasingly it is the misuse of the schemes in the professions that is occupying the IRD's attention.

This largely is because of the unique structure of partnerships and the limitations they put on salary packaging.

The IRD is believed to be negotiating for retrospective tax payments from the many professional firms involved, as part of 'package deals'.

One prominent accountancy is understood to be under IRD scrutiny and has been holding discussions with tax authorities to discuss the best ways to pay back taxes.

Many partners of professional firms have established service companies to receive their salaries, to take maximum advantage of tax deductions available in such areas as housing and travel.

While there has in the past been little advantage in setting up service companies in terms of actual tax liabilities incurred, these structures have offered significant benefits because they allow deductions for fringe benefits.

Professional partnerships traditionally have paid a 'management' fee to the service company, which is controlled by one partner.

This type of arrangement saw partners regarded as 'consultants', providing services to the partnership.

The legislation introduced last year deemed that all agreements between companies/partnerships and the individual service companies should be regarded as relationships between employers and employees.

There is mounting concern that the legislation's impact on the professions, given the apparent level of tax avoidance that has gone on there, will be negated by recent moves to allow accountants and lawyers to incorporate.

It is feared this will create a loophole for partners of professional firms.

'Once professionals are allowed to incorporate, they become employees, and this can allow them to salary-package income,' a senior tax partner at one Big Six accounting firm said yesterday.