Columnist Michael Coote retells the Penny and Hooper tax tale and exposes the perils of tax arbitrage

Columnist Michael Coote retells the Penny and Hooper tax tale and exposes the perils of tax arbitrage

By Michael Coote*

Tax arbitrage has come to the fore in recent weeks with the widely publicised Penny and Hooper case. Tax arbitrage occurs where taxable income is directed into a lower tax bracket than might otherwise apply.

Although the practice is not intrinsically illegal, and in its legitimate form might be described as tax minimisation or tax efficiency, under certain circumstances it can be classified as tax avoidance or tax evasion prohibited under the Income Tax Act. This uncertainty leaves a grey area wherein it is not necessarily obvious an arbitrage is in fact illegal avoidance or evasion.

It will be recollected that Messrs Penny and Hooper were Christchurch orthopaedic surgeons.

Their tax situation was well summed up by Grant Thornton’s Geordie Hooft as being composed of one part that was held to be legally unobjectionable and another that was adjudged to be illegal tax avoidance. See Amanda Morrall's article here.

On the unojectionable side, Mr Hooft wrote:

“Each [surgeon] transferred their private practice from their own name into a company, the shares of which were held by a trust They paid themselves a salary from the company, with the balance of the company’s profits going to their trust as dividends. As a result, the amount of business income taxed in their names (at higher personal tax rates at the time of up to 39%) was reduced, with a greater proportion taxed at the trust rate of 33%.

In both cases, the surgeons still had access to the income, via the trusts. The Supreme Court said that most of the facts didn’t cause a problem.”

“Delivering the Court’s unanimous decision, Blanchard J described the structure as ‘entirely lawful and unremarkable’ and ‘a choice the taxpayers were entitled to make.’” 

So far, so good.

If you are the self-employed proprietor of a business, you can transfer ownership of that business across to a registered company structure and become a paid employee of the company. You can place that company’s shares in trust, with the company paying over surplus income to the shareholding trust as dividends after wages, salaries and other business expenses have been deducted.

If you are also a beneficiary of the trust, you can receive income tax-paid at the trustee rate that was originally sourced as dividends paid out by the company.

How the surgeons saw their income tax arrangements

While Mr Hooft was positive about the above aspect of the court’s ruling, he had serious concerns with the implications of what the court otherwise decided regarding the question of a “commercially realistic” versus “artificially low” salary drawn from the trust-owned company.

Under the trust-owned company structure, the surgeons had routinely received salaried income for their private practice work.

This salary was calculated on the pay rates they would have earned for doing the same work in public hospital practice, wherein remuneration would have been a lot lower than for private practice, but otherwise was set at an objective arm’s length basis.

This public hospital rate or pay could be called the “market rate” or “benchmark” for what the surgeons’ work was actually worth as company employees rather than as self-employed proprietors.

The “benchmark” part of the surgeons’ earnings attracted up to a 39% marginal tax rate, depending on how much their companies paid them as salary calculated on this rate.

By contrast, the surplus private practice income left over and classified as a company dividend was taxable at the shareholding trustee’s rate of 33%.

There was thus a significant tax arbitrage advantage available where private practice income could be taxed as a company dividend at the 33% trustee rate rather than as salaried income at the 39% personal marginal tax rate. This arbitrage arose from the difference between what the surgeons’ companies actually charged patients for their employees’ services in private practice versus the lower rate the surgeons would be paid for performing the same work in public practice.

At the margin it meant the surgeons having access to income of 67 cents (2/3) in the post-tax dollar from the shareholding trust rather than 61 cents (3/5) as salaried employees (or self-employed proprietors).

Indeed, it would have been in the direct material interests of the surgeons to maximise their private practice earnings relative to the public sector remuneration rates payable for their exertions, as these earnings flowed through to the trust as dividends from the company they worked for. The trust still paid tax on its company dividends received, so the IRD was not being swindled, surely, because everything was being done by the book at the applicable tax rates for trusts and salaries.

The arrangement was one of tax minimisation or tax efficiency, in which it just happened that significant trust income became available to the surgeon’s sourced from the dividends paid by the companies that employed them. All this might seem entirely reasonable, but that was not the way the IRD saw the matter.

The IRD’s contrary view

The IRD took the view that the surgeon employees of the companies were in fact still the working proprietors, regardless of external appearances created by the trust and company arrangements.

These working proprietors were accused of artificially lowering their taxable incomes by setting a rate of remuneration in private practice that was not commercially realistic, notwithstanding the fact that the rate was what was paid for public hospital practice.

On this basis, the IRD effectively “looked through” the shareholding trust to determine that the surgeons in effect drew full benefit from the profits of their businesses.

Accordingly, and despite a “nominal deduction to allow for a return on capital employed in the business”, the IRD deemed that all of those profits arising were personal salary income of the surgeons taxable at the full marginal rates applicable.

The Supreme Court agreed in this particular case.

What this court decision brings out is that the formal arrangements – in this example a company that was owned by a trust – are not by themselves sufficient to prevent a tax arbitrage from being adjudged tax avoidance or tax evasion, even if the tax formally owed under such arrangements has been scrupulously paid.

In effect, the taxman had been shortchanged by the trust-owned company structure, and this created tax arrears liabilities for the two surgeons.

Hope springs eternal

To confuse matters again, however, the Supreme Court did allow that under certain circumstances it could be legitimate for company employees of a formerly working proprietor business to receive salaries that were lower than commercial reality.

Specific examples given were where there was a need for capital investment in the company, or the business was assailed with current or foreseeable financial difficulties.

This was the IRD’s previous position also, but that leaves the matter very much case-by-case, with the risk remaining that a tax arbitrage that looked like legitimate tax efficiency or minimisation might well turn out to be illegal tax avoidance or evasion subject to penalties.

 “It’s not just orthopaedic surgeons that are at risk,” writes Mr Hooft, “Any professional or trades based business is potentially at risk.”

“Business owners will not only have to consider how they deal with salaries in the future,” he continued, “ they will also need to think about how they have dealt with them in the past.”

To clarify matters, the IRD has since put out Revenue alert RA 11/02, but tax practitioners have complained that very little protection is afforded to taxpayers by this particular document and accordingly that the uncertainties of the law around tax avoidance still represent a threat.

*Michael Coote is a freelance financial journalist whose publication list includes interest.co.nz, the National Business Review, New Zealand Investor, The Press, and the New Zealand Centre for Political Research.

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59 Comments

The simple test is to look at the return on equity of the company.  If it is 10%, I'd say that the IRD won't blink an eyelid at whatever the salary is.  On the other hand, if it is 10000% (I'm guessing that this is likely in this case) the IRD is going to look at the arrangements very closely when it involves shareholder employees selling their time at an hourly rate.

This ruling will affect all sorts of people - for example IT contractors (the industry I work in).  

Agreed Mark. what is yje return on assets goodwill etc. Thats the business profit. Then how much did the shareholder employee earn

sounds nice until you have to value goodwill and get agreement when contested. Unless your acquire a business it  is rather difficult to agree on equity for firms who have established and generated goodwill over time. I would never be satisfied with a buisness not returning in excess of 25% pa however I'm sure the IRD would see it differently.

Mark and Spirk hit the nail on the head.The rule of thumb in such a case is to ensure that at least 80% of the profits are paid out.That leaves a return on capital of no more than 20%.That is commercially realistic.It keeps you away from IRD scrutiny.it passes the commercial reality test.If you set up structures which are commercially unrealistic,you are leaving yourself exposed to possible attack.

Whatever name you call it, that's still tax avoidance.

Correct Billy.Coote should not be referring to the term tax evasion in his article if he does not understand the term.If these guys had been paid some of their earnings in cash and had put it in their back pocket,that is tax evasion.In this case they put structures in place which AVOIDED paying tax at the highest rate.

silly billy

Silly Speckles.

I have no sympathy with the "uncertainty" that is created for these kinds of earners. 

By definition these are high-income professionals developing sophisticated business structures.  So they can't except simplicity.  Simplicity and certainty works for grunts serving meals at a cafe. 

If the surgeons are that level of thinking, they should just pay their taxes on salaries earned & not try to be clever.

"Trusting" surgeons.  What a laugh!

Cheers. 

Philly is correct.I believe that these taxpayers were given tax advice which was inappropriate and too aggressive.If they had been given conservative advice,they would have no issues to deal with.Now there are the other cases waiting in the wings.I understood that there were around 15 cases in the ortho surgery area which IRD had under scrutiny.

Coote writes articles for the NBR, which is running a hate campaign against the IRD and its pursuit of high-income earners who manage to evade tax.   No doubt they have the BRT cheering them along.

The next thing the BRT will be sponsoring a Tea Party-like movement in NZ to protect the rich from taxation.

Lucky us!

 

... you must be the IRD's only ever private citizen cheerleader ..... kind of like being a shag on a rock , it's lonely out there .......

Hardly lonely.  Most NZers would like to see the rich having their tax rorts trimmed.  All power to the IRD on their hunt.

There are some ultra right wing libertarians who disagree of course.

Cheers

 

The " rich " as a group , already pay the lion's share of PAYE tax in NZ . And given the attack upon them from prize prats such as Michael Cullen , I don't blame them for getting narked , and for seeking tax minimisation schemes .....

...... prior to 1999 no one in NZ focused too much on tax rates . After Labour swept into office and immediately provoked the wealthy citizens with a new 39 % tax on the " rich pricks "  , and they attacked business in general ( " we won , you lost ... eat that ! " ) ..... suddenly alot of folk in the productive sectors of the economy got seriously shitty ....

Since then , " tax " has become a topic of constant discussion . And the " rich " are rightfully pissed off !

a good history lesson GBH .. how quickly it is forgotten .. it was Roger Douglas's primary objective .. to eliminate the tax avoidance industry .. and one takes it from your comment he succeeded ...

No , one definitely does not take it from my comment that Roger Douglas succeeded .

You miss or deliberatly ignore the fact that the "really" rich are not on PAYE...they go for capital gains which is tax free....hence a CGT.

Productive economy, uh no.....sure there is the productive economy, there would also seem to be a section of the "rich" that are not terribly productive....and if anything look to be parasitic....ie they damage our economy.......they speculate and the poor end up paying for that if they win and if they lose.

Now Im pretty sure Labour will lose this time....but by 2014 we wont have paid of the debt and will very probably be in deep deep doo doo.....and the voter will be wondering wtf is going on when Natioanl dont deliver on "growth" they know they cant deliver on.

Tax certainly is a topic of discusion as is supporting the public services.....its going to get a lot hotter....so expect a CGT and probably a lnad tax.....just look at Greece for the end game in that respect....

Anyway Gummy you live in the 3rd world, so why worry about little NZ....surely you should be agitating the Govn over there?

regards

How do you know that, Steven? Do you have their names, addresses and copies of their tax returns together with sufficient knowledge of their financial affairs, so you know for sure what they should have been paying? Or is that just your opinion, a prejudicial opinion of a true labourite, tax-the-rich-pricks-at-all-cost, lefty? And ditto for you too, philly.

David B: steven, by his own declaration is a foreign blow-in from the UK, has been here 16 years, and is still here. Has a 17 yo son, so arrived with a ready made family, so must be a genXer. Many of his posts have a distinct subtext of class hatred and prejudice which is not a kiwi characteristic. His frequent attacks on wealth suggests he is not a "rich prick" himself, and did not bring any family dynastic wealth with him to NZ. However, given the prolific volume of his postings on the website during the day suggests he has much time available, so, he may be either a "rich prick" with an altruistic streak, and a lot of time on his hands, or possibly even a recipient of the nz welfare system.

There have always been "rich pricks" in NZ. They were here before steven arrived, and they will be here long after he's gone. But, all said and done they are "our" rich pricks, and steven does not have the right to come here and attack our "rich pricks". You don't see any of his class warfare coming from any of the few kiwi locals on the website. 

My take on him is that he is a paid green troll with links to carbon trading and joke wind farms - hence the constant AGW b/s  . He's profoundly misanthropic and seems to have a  pyschological need for validation on a financial blog. Go figure! 

I agree with your sentiments entirely, iconoclast. I've often wondered if Steven's prolific postings to the board during the day might in fact suggest that he does not work. Maybe he himself will tell us what he does and how he supports himself and his family?

You raise a very good and valid point about imported class hatred injecting itself into the New Zealand context. We don’t have ‘classes’ here of the type familiar to most Britons. We never have and we probably never will.  It is not a Kiwi characteristic as you say, yet it is bothersome, and I would go so far as to say destructive, when foreign immigrants bring their social, economic and political unfinished business with them and project it onto this nation, not realising that their unmet needs and wants have nothing whatsoever to do with us. It sidetracks and wastes our nation's time.  When they immigrate here for a new start they need to leave their baggage at home, and actually make that new start.

You may have read in the papers recently about the charges that were dropped against the Urewera 17 or whatever it is that they are calling themselves. But four remain before the court, two Maori and two pakeha. The charges that they are facing are quite serious. One of the concerns expressed was that the whole group had gone to a camp to talk about politics and Maori sovereignty, and independence for Tuhoe, armed with guns. The two pakeha’s are foreigners. 

I wasn't going to enter this conversation but I will after all. Here's my 2 cents worth... It'd be really nice if the nasty comments about foreigners stopped coming. I'm not saying that just because I am a "foreign blow-in" - they just hardly add value to the debates.

I may not agree with everyone's viewpoint (including Steven's!) but personnally I always find it interesting to read how other people think and try to understand their reasoning. Where'd be the fun in debating with people who all have exactly the same background and agree with everything one says? That'd be hugely boring and uninteresting. I don't mind having my own views challenged - in fact I like it because it makes me think harder about things and I see that as a positive (plus I like a good argument LOL). Where a person was born (or their colour or religion for that matter) really doesn't come into it for me.

Elley

We are all foreigners at some distant point in time....blanket statements are more often a primal fear response to difficulties in extrapolating the exact nature of change that serves to alienate or cause discomfort....

 The classic resistance to change  will always be punctuated by finger pointing in a collective way...in an effort to direct attention away from ourselves being part of the problem.

Try not to care too much......Nations are built on the backs of Foreigners for better or worse we move on.

There was a very good analysis by Brian Gaynor in the Herald a few years ago about how our rich pricks after looting this country then set themselves up to pay NO income tax in NZ.  The main indicators of this were going overseas for at least a year, then only returning for less than 6 months a year. 

(By the way Iconoclast and OMG try addressing the issue instead of attacking the person; even more so don't attack people on racial grounds.)

 

Hey, Andrew, rather than just making such a sweeping statement and pointing to some vague article written by one person several years ago, why don't you back up what you are saying with some actual up-to-date facts and figures. After all, if what you are saying is right, then it shouldn't be too difficult to prove it, correct?

Show us how big the problem really is, and let us judge the validity and applicability of your argument.

Considering I have yet to see any proof in your posting for one thing you have said v one for Andrew at least linking to a Journalist to support his opinion I think you need to try harder. In fact I dont recall much of any opinion or thought on events or economics on your part except for attacking ppl who do have them.

I seem to recall last week I commented on some of the very dire possibilities of AGW with a rise of 6.5Deg C penned by some very good scientists and you thought it was very amusing.....no quality rebuttal citing some evidence or contra-view.......and hear you are critisising Andrew....who at least cities a journalist of some reputation. (who I'll hasten to add I dont agree with on several areas)...

Beyond that however there is no point in showing you the problem or solutions in detail because your political blinkers and rascism against anyone not multi-generation kiwi makes it pointless, all you do is uh...laugh...  Rational ppl on the other hand can look at the information from the likes of Roubini, Steve Keen, HS Dent, Nicole Foss and Paul Krugman on the one hand who say we are in dire straights and heading for a recession/depression or the voodoo "economists" who think all will be well and we will have inflation so raise rates now, now, now.....or those (Austrians?) who say we should be making cutbacks to get out of this mess, severe austerity will make us grow......

Never mind it looks like in the next few months or at best few years we get to watch and validate who is right....my money is on Steve Keen, Nicole Foss, Paul Krugman and HS Dent....place your bets.

Tell you what; OMG, David B, and Ioncast, lets see your opinion of where the OCR will be in 12months, 2 years and 3 years....will be have a boom, inflation, stagflation, recession depression....?

So you think oil output at 86mbpd will be as is ie give or take 2% in 12months? 2 years? 5 years?  or where 10% higher?  20% higher? 10% lower, 20% lower?

What effect will that have on NZ's economy? the World economy?

regards

So my bets....

Depression or severe recession within 5 years at best....probably 2 years....so >5% shrinking GDP per annum....

OCR below 3%.....maybe even <2%....

Oil....2 years out 86mbpd +/1 2% at best, 5 years out 10% down....

AGW, record temperatures set in 2012 or 2013 exceeding 1998/2005....a clear upward trend.

regards

Lol nice work Steven , who will you be using for the temperature figures Al Gores dad. Good on you for hanging it out there though. As for the financial projections , probably about right , possibly a little sooner.
Questions for you , has the oil supply form Iraq been strangled since the globalists took it over ? And if you were in control of what little information there is available from the fascist climate & energy cartels (same people ) would you tell the truth ?
Do you believe man kind is earths cancer ?

The Gaynor  article is called "Tax exiles cost NZ more lost cash", from the Herald on 9 May 2001.  You will need to search on the Herald site using the article title to find it.

Be interested to hear if you think this method of not paying tax in this country is still being used.

Andrew R, when I first posted on this board I copped a pile of unmerited abuse from Steven and Kunst

"ppl" like me have frankly had enough and I reserve the right to call my shots as I see them.

Racial grounds?? HMMN Trawl my posts and provide evidence please.

 

 

Not unmerited abuse, from my point of view but probably retorts to items you posted that we didnt agree with or were falsehoods....

If you think it is unmerited abuse, by all means report it at the time.....

regards

OMG you're a little out of line there mate, i don't think Steve or Kunst have ever abused anyone... tested out the new boy yes, abuse no!... Interweb anonymity places little value on time wasting pleasantries....good to see Steven turn up and defend himself though...

OMG -  ....a pile of unmerited abuse from Kunst.  Please prove your reproach.

Ireland 15 : Australia 6  .......... crikey Walter , I reckon that Switzerland would've beaten that Wallaby team !

... go Ireland ! ... awesome !!!

. Roger - must half time score or ? No ! WoW ! Good - to see small nations coming out on top.

It has been my mantra for some time , Walter , that small is nimble & efficient  , .. small is beautiful , ..  small is good when you're coming out on top  .......

...... awwww , come on honey-gummy , put away the magnifying glass , .. it's not that small !

[ .. Shag.. , .. where is it ?.. ]

 Roger - wow you are excited - are you of Celtic extraction or is it just simply because small is becoming big or both ?

My  dictionary translate shag into 3 possibilities – hmmm Roger naughty - okay how big do you want to go ?

Roger , Roger, Rogie where are you - please don't get over excited and blow up !

Oh, that could be messy all over the Philipines - Roger with his 120kg - everywhere.

I'm of a split mind , Walter : The Russian blood my veins wants me to get rat-arsed on vodka ; My Welsh blood says to form a choir and have a sing-song ; The Scottish part says screw the vodka , have a dram of a Highland single malt whisky ; And my French blood says forget all that and just screw the maid ...

... decisions , Walter , decisions !

ohh  Roger what ever you say - I'm glad you are still among us. I hope for you it is the Welsh and then the French blood - a good combination - good night.

Excellent idea , Walter ... a little " yodelling in the valley " as they say ! ... that'll give you and the Dominatrix  a good night ..

... Yipppppeeeeeeeee !!!

Ja, die Peitsche steckt schon in her Lederhose.

I hope David B. doesn't mind a little bit German.

Hi OMG. 

The racial grounds was an observation arising primarily from Iconoclast's comments about Steven not being born in NZ and suggesting that that fact means that steven does not have the right to come here and attack our "rich pricks".  

 

 

 

Thanks for the clarification, I can now look my wife of 25 years in the face - she is Chinese BTW.

I see Steven is now calling me a liar, hope you noticed. Everyone else he disagrees with is a "kook" "denier" "nutjob" "senile" etc, etc, tiresome really. 

Still takes all types to make a world.

Have a good weekend, including you too Steven.

OMG you have to understand that the core posse who frequent these boards are not tolerant people, they think they know who you are & what you're about , because they believe these boards are real life. People make mention of holocausts , and loose racial postulating when referring to climate deniers etc.
If you don't agree you get called names, that's how it works here. Makes me laugh, it's made for great fodder. Don't stand for it , there are few here with the brains to have an open mind. Punch on

I see....so we have moved on......

Liar, tis simple.....if I think you are wrong, or laying a falsehood I will call you on it.....and look for you to prove your claims....

If you thank thats me calling you a liar, so be it....you are welcome to your opinion.

regards

Higher income people may pay more taxes on their income - when the IRD gets to shut down their tax rorts.

But that doesn't stop them using the huge gaps in our tax system to get rich thru non-taxed capital gains.

More and more of NZ's wealth & assets are ending up in the hands of the rich.  Hardly reason to be "pissed off"!  - unless they indulge in total self-serving greed.

Cheers

There were plenty of loop-holes in our tax laws prior to Labour 1999-2008 ...... so why the sudden burst of energy to utilise them after 1999 ? Michael Cullen's politics and policies of envy drove the " rich " into trusts and LAQCs . The unintended consequence of his boorish behaviour was that less tax , not more , was paid by the " rich " .

.. don't get me wrong , Gummy would love to see a simpler and flatter taxation system , introduction of a land tax ( but no CGT ! ) ... it'd be a brilliant time when accountants were barely needed , and when " tax-advisors " were an extinct species .

But attacking one group in society , as if by punishing them , then the rest of us are better off ..... that is just pure idiocy .

"punishing"!!

Wow, you right!  Like the bankers and other executives!  Its amazing how they are (just) managing to just keep their heads above water!

lol.  Cheers

Incorrect Gummy Bear Hero.Prior to 1999,lots of taxpayers focused on tax minimisation.In 1982,under Rob Muldoon,you paid 35 % income tax on that portion of income which exceeded $5500,48% on that portion of income which exceeded $12600,55% on that portion of income which exceeded $17600,and 60% on that portion of income which exceeded 60%.Of course taxpayers in that era undertook behaviour to minimise income taxes.As for LAQC"s they are just alot of hype.in 1982 if you were an ortho surgeon and purchased something which would operate at a loss,such as a farm needing developing,or some rental property which was highly geared,you would just buy it in your own name,and directly offset the losses against your income.As for trusts,these are hardly a creature which originated in 1999.

How can having a shag on a rock be lonely?

Nope make that two.....

Im all for the IRD collecting taxes owed as the elected Govn wanted.

regards

No Gummy Bear Hero,he is far from alone..There is the silent majority out there.

This case has its limitations however...putting it aside

The legislation should be clear, made clear or alternatively the IRD declare its position early on. The delayed result of tax cases results in many smaller tax payers being damaged with additional penalties and UOMI on a revised tax position years after the initail tax position was taken and assessment issued. Has this case provide total clarity...no it has resulted in more uncertainity!!

Why do we have to clarify long standing issues years down the track. The rule of thumb is something like an IRD audit error discovered a couple of years later will be doubled by penaties and interest when detected.

I'm aware of a case currently that the IRD is demanding repeatedly answers on a trust where the tax payer is actually paying no less tax either way, it been set up for purposes other than tax. The system is nutts.

Ppl will always try and minimise tax bills....hence they are paying a lot of money for tax consultants to be inventive....hence its always going to be slow and painful....

regards

The law surrounding defining market value salaries per the tax law has been unclear area since at least 1995..should have been sorted well before now. A easy tax case for the IRD does not settle the issue for those taking a more thought out and balanced approach.

 

 

The Penny and Hooper cases emphasize that there are tax advisors and there are tax advisors.If you deal with a competent tax advisor who applies  the ground rules as they have been well known for years,you will not get into trouble.If you set up structures which result in commercially unrealistic outcomes,beware.As for the case you mention,the fact is that a certain number of taxpayers are subject to review or audit.Questions may be asked by IRD auditors which are not logical.So what.. It is no different to being stopped by a traffic officer and being asked illogical questions...or being at an airport and being subject to illogical scrutiny by airport staff.Just answer them truthfully and get the matter over with...The world is full of lots more red tape than it used to be and itis not going to decrease.

Well, this has generated a fair amount of debate about the tax burden of the rich...

What is missing from this article, and the comments associated, is the basis for the Supreme Court's finding in Penny and Hooper.  IRD didn't succeed because tax minimisation structures had been used.  IRD didn't succeed because the Court considered Mr Penny and Mr Hooper's respective salaries to be 'below market rate', whatever that may be. 

The Supreme Court found in favour of IRD because these people retained complete control over and access to profits generated by their businesses and settled on the trusts.  Despite the structures in place (and these structures weren't  complicated at all), these surgeons had absolute access to all their income, regardless of where it was in the structure.  Indeed, Mr Penny argued that his main reason for the structure was to minimise personal liability and protect against professional claims against him.  The SC found this to be a nonsense because he wasn't keeping money aside for such claims, and in fact he had other coverage in case of such an eventuality.  

The point is that these men were earning, and spending, in the region of $400 - $500k p.a.  At the same time, they were paying tax on earnings of around $100k p.a.  There was no legitimate business reason to explain the gap.  Case closed. 

Mr Coote's article is biased.rkwrkb is correct in his analysis.The man in the street was correct.