Changes to LAQC Rules
Look Through Companies (LTC)
The Taxation (GST and Remedial Matters) Act 2011 introduced changes to the tax treatment of qualifying companies. It also introduced a new entity known as the look-through company (LTC). These changes came into effect from 1st April 2011. Refer to the IRD web site Look Through Companies
Existing Loss Attributing Qualifying Companies (LAQC's) will default to a QC from 1st April 2011. QC companies cannot pass losses to the shareholders, refer to IRD web site LTC, LAQC and QC Companies.
LAQC's have been regularly used to hold rental properties where the losses can be attributed to the shareholders and result in a lowering of PAYE tax. With the law change this will not be possible unless the LAQC is transferred into a LTC structure.
We recommend discussing whether to move to a QC or LTC tax structure with your accountant. With the changes in depreciation rules from 1st April 2011 you may find the rental property that was making a loss is now making a small profit.
If the shareholders of an LAQC want to transition to an LTC they must make an LTC election six months from the start of the transitional year. For a 31 March balance date this is September 2011 or 2012. The LTC rules apply from the start of the transitional year.
Download a copy of "Look Through Company Election", IRD form IR862 from the IRD web site, The notes on the back of the form are helpful.
How to use LTC's
In practice if your LTC company is making a loss the loss can be passed through to the shareholders or retained in the company. If the LTC is making a profit then the profit has to be distributed to the shareholders.
LTC and Your Family Trust?
Transferring your assets to a family trust means you don't own the assets anymore, the family trust does - this is important to protect your assets. The taxation issue for losses in a family trust works in a similar way to losses in a regular (QC) company, the losses can only be carried forward and offset against future income rather than receiving immediate taxation relief or refund.
The family trust is still a good ownership vehicle if you are buying highly positively geared properties that will either do not make a loss or will make very minimal losses prior to becoming profitable.
If your intention is to make a capital gain and pay tax on this capital gain then you should hold your properties in a separate company to avoid all your other investments being tagged and ending up paying tax on the capital gains. You do need to be cautious due to "The Associated Persons Rule" and amendments. You should seek expert advice when in doubt.
How do I elect for the company to become an LAQC?
Either go to your accountant who will arrange this for a small fee, or download the form directly from the IRD. Download a copy of "Look Through Company Election", IRD form IR862 from the IRD web site, The notes on the back of the form are helpful.