Property investors were nervously waiting for the Government’s response to the Issue Paper on the Loss Attributing Qualifying Company (LAQC) Regime, which was released on October 15.
In terms of the proposed legislation, LAQCs will not be eligible to attribute losses to shareholders from April 1, 2011. On that day, the new Look Through Company (LTC) Regime will also be in place.
There are a number of differences between LAQC and LTC.
A LTC’s income, expenses, tax credits, rebates and losses will be passed on to its shareholders in accordance with their shareholdings in the Company. The treatment of LTC is for income tax purposes only. The LTC will retain its identity as a registered company, while its shareholders will have their limited liability under the Company Law along with the attendant obligations.
The LTC legislation limits the number of shareholders similar to LAQC legislation.
However, there is a subtle difference in case of corporate shareholding. Previously, a Qualifying Company or LAQC could be a corporate shareholder in another QC/LAQC.
But in case of LTC, there is no ability to have a corporate shareholder.
Therefore, existing QC/LAQCs with QC/LAQC corporate shareholders cannot transit to the LTC regime.
LTCs would be subject to a Loss Limitation Rule (similar to Limited Partnership), enabling shareholders to offset the losses against their other income to the extent the losses reflect their economic loss.
This economic loss is the shareholders’ investment in the company and will include share capital, shareholders’ current accounts and the debt guaranteed by them or by their associates.
Shareholders’ investment is calculated as the sum of the equity, goods or assets introduced or services provided to the LTC or any amounts paid by the shareholder on behalf of the company. It would also include loans made by the owner to the LTC, share of the LTC debt guaranteed or indemnities provided by the owner or their associates. Share of the net LTC income previously recognised and capital gains previously realised are taken into account.
The following will be deducted: Distributions, including dividends, made by the LTC to the owner; share of the LTC debt guarantees (or indemnities) extinguished by the owner; share of the net LTC loss previously deducted; share of the capital losses previously realised; any previous distributions; and the amount of investments made by an owner within 60 days of the last day of the LTC’s income year.
An important component in the above calculation will be the share of the LTC debt guaranteed (or indemnities provided) by the owner or their associate. This should comfort the existing property investors who normally guarantee loans over the properties that are owned by LAQCs. Therefore, shareholder may be able to offset the loss flow through against their other income.
The main options for shareholders and directors of existing QC/LAQCs are (1) Default Option to continue as a QC/LAQC without the ability to attribute losses to its shareholders (2) Revocation Option: Revoke the QC/LAQC election and be taxed as an ordinary company (3) Election Option: Enter the new regime of LTC and be taxed as a Look Through company (4) Restructure Option: Restructure to a limited partnership, an ordinary partnership, or sole trader. There will not be any tax cost under this option. However, the company should become non-active or closed down.
LAQCs whose balance date is March 31 or later, will have six months after the start of their 2012 Year (April 1, 2011 to September 30, 2011). For example, a LAQC with March 31 as the balance date can elect to transit into LTC regime on or before September 30, 2011.
The LTC legislation is complex and you should seek advice from your accountant.
Vijay Talekar is Director, Tax Experts Limited (Chartered Accountants), based in Auckland. The above article should be considered only as a guideline and not specific advice. Mr Talekar absolves himself along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.