The first problem that arises is if the male goes off on ACC. He will only receive 80% of $30,000.00 even though his true income was $40,000.00.
The second issue arises is whether this is tax evasion. I asked the IRD this question and was advised by Graham Tubb, the National Manager Technical Standards that if a farmer pays an employee's spouse as an employee who does not in fact work on the farm, then this may be considered by the Commissioner to be an income splitting scheme to avoid tax.
Such schemes will always be closely examined by the Commissioner, and where tax avoidance has been identified the Commissioner, depending on the nature of the arrangement, may consider whether all or some of the income earned by the spouse should be attributed back to the employee. In some cases it may be appropriate to disallow the deduction to the farmer.
Salaries are usually paid to someone who is employed to work in the business at a level according to their skill and qualifications. In order to be deductible the expense must be for the purpose of earning gross income or necessarily incurred in the running of a business. Therefore if a salary is paid to someone who is not actually working for the business then there would not be an allowable deduction.
Action taken by the Commissioner could include the consideration of shortfall penalties. Shortfall penalties range from 20% for not taking reasonable care to 150% for evasion. A penalty of 100% may be charged for taking an abusive tax position, and if the scheme has been promoted by a person then the promoter may also be liable for a penalty of 100% of the sum of all the tax shortfalls resulting from taking an abusive tax position from all the participants in the scheme.
Taxpayers may make a voluntary disclosure, in which case a shortfall penalty may be reduced by as much as 75% if the disclosure is made before they are advised that the department intends to investigate them, or by 40% if a disclosure is made between the time they are advised of an investigation and the time an investigation begins. The penalty may also be reduced by 50% as consideration for previous compliant behaviour.
