In the 90′s the New Zealand Government encouraged the use of Loss Attributing Qualifying Companies (LAQC’s). LAQC’s were used by those holding investment properties and others expecting to make a tax loss. However, this is no longer the case. From 1 April this year LAQC’s have become a thing of the past. Losses will no longer by attributable to shareholders for tax purposes. Many people have been questioning the options and wondering where to from here?
What are your options?
- Sell the investment property.
- Do nothing. It will become a qualifying company.
- Revoke the QC status. It will become an ordinary company. Advantageous if the company is in profit as the company tax rate is 28%.
- Wind up the LAQC and transfer it into the shareholders names (future tax losses will reduce your personal tax).
- Wind up the LAQC and transfer its property to a family trust (if it is in profit).
- Convert into another structure such as a limited partnership, or into a Look Through Company (“LTC”).
What is a “Look Through Company”?
The LTC removes many of the tax benefits previously enjoyed by a LAQC. A LTC allows tax losses to be passed to shareholders (or “look through owners”), these are then taxed at your marginal tax rate. Tax losses can only be used by owners in the proportion of their investment in the company.
What does a LTC involve?
- Profits AND losses flow through to the shareholders for tax purposes. Profit is taxed at the personal rate.
- There must be no more than five sharedholders. A LTC is restricted by the inability to have a corporate shareholder.
- There is a “look through counted owner test”. Shareholders related by blood, marriage, civil union, de facto or adoption all count as relationships that constitute a single owner for the purposes of the test.
- Disposal of shares is treated as disposal of underlying assets, with all tax implications.
Is a LTC better than a partnership?
- LTC’s are limited liability, so they protect shareholders personal assets.
- Movements of shares in an LTC will not involve conveyancing and may be shielded from tax for small amounts below a threshold.
- However, accounting will be more complex because the LTC must be monitored to ensure the loss limitation provisions are not contravened.
When must you act?
You have six months after the start of the 2012 income year to elect to change to a LTC without incurring depreciation clawback (cut off of 30 September 2012). You should talk to your accountant who can estimate whether your company is likely to make a profit or loss in the next few years. Then we can discuss with you what sort of restructuring may need to occur and put this into place.