The decision was made on 12 April 2010, by the New Zealand government to replace current qualifying company and loss attributing qualifying company (LAQC) rules with full flow-through treatment for income tax purposes (similar to the rules currently applying to limited partnerships i.e. In part, income and losses will ‘flow-through’ in proportion to interest in the company). The discussion document suggested the following changes.
- Qualifying companies would be deemed “partnerships” and not “companies” and their shareholders to be “partners” for income tax purposes but remain as “companies” for GST purposes. They will file a partnership tax return and not a company tax return.
- Income and losses to be attributed to shareholders based on their ‘effective interest’, subject to an anti-streaming rule. This income would be taxed to or deducted by at the shareholder’s marginal tax rate.
- Loss-limitation rules would apply to prevent shareholders from deducting losses in excess of their investment.
- As with LAQCs, one class of shares would be required for all QCs, carrying the same decision-making rights and the same rights to distributions of profits and assets on a return of share capital.
- Shareholders of a QC would no longer be liable personally for unpaid company income tax. Removal of requirements not to have income interests in a CFC.
- No disposal or reacquisition of a QC to a new QC, on transition, but a deemed disposal and reacquisition at market value when a QC loses its status or is liquidated.
- Qualifying company election tax would be retained for companies entering into the new QC rules, but the liability to pay would be imposed on shareholders according to their effective interest in the company, rather than on the company.
- The associated person test would apply to a QC as in a partnership, to associate a QC with its shareholders regardless of the size of their interests.
As a result of public consultation regarding the reform proposals, further changes have recently been announced to prevent the LAQCs passing losses on to their shareholders. The Revenue Minister Peter Dunne is quoted here on 12 October 2010.
“The Government will introduce new rules preventing loss attributing qualifying companies (LAQCs) from passing losses on to their shareholders”,
It has also been announced that the changes “would also provide flow-through income tax treatment for closely held companies which choose to use them.
“In response to feedback from small business, the government has also decided to review the tax rules for dividends, with a view to simplifying them for closely held companies. Until this review is undertaken, existing qualifying companies and LAQCs can continue to use the current qualifying company (QC) rules, but without the ability to attribute losses.”
In summary the main changes listed on the IRD Policy Advice Division following this announcement are as follows.
‘i. Introduce new flow-through income tax rules for closely-held companies.
ii. Allow existing QCs and LAQCs to transition into the new flow-through tax rules or change to another business vehicle such as a limited partnership, without a tax cost.
iii. Allow existing qualifying companies (QCs) and LAQCs to continue to use the current QC rules without the ability to attribute losses (until a review of the dividend rules for a closely-held company has been completed).’
With this new announcement comes a new income tax entity called a ‘look-through company’ (LTC). Shareholders of a closely-held company can elect to become an LTC (still a registered company) and income, expenses, tax credits, rebates, gains and losses are passed on to its shareholders, in accordance with their shareholdings in the company. Losses can be offset only to the extent the losses reflect their economic loss.
What should I do?
There are several options available to property investors have a rental property owned by an LAQC – you need to have a chat with us to see what is best for your situation.
Here are some of the available options:
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