A subject dear to the heart of all clients with residential property investments is the LAQC, otherwise known as the Loss Attributing Qualifying Company; a very useful device which allowed an LAQC’s profits to be taxed at the corporate rate, but the LAQC’s losses to be offset against a shareholder’s other income at the shareholder’s marginal income tax rate.
This was most useful for most residential property investments, which often ran at an operating loss with the help of depreciation, while accumulating long term capital gain (or at least that was the theory). Depreciation, of course , is also dissappearing for residential property, but that will be the subject of another post.
The Taxation (GST and Remedial Matters) Bill received the Royal Assent and became an Act on 20 December. Among other things, it has introduced a new tax transparent entity called the “Look-Through Company” or LTC. The LTC gets treated as a partnership for tax purposes between the shareholders. Income, expenses, tax credits and losses will be passed onto shareholders subject to the application of a loss limitation rule. Existing Qualifying Companies (“QC’s”) and LAQC’s can elect to be subject to the new rules, or they can transition to a new structure such as a partnership, a limited partnership or sole tradership without incurring a tax cost.
If they do nothing, existing LAQC’s/QC’s can continue to use the current qualifying company rules but without the ability to attribute losses to shareholders – although a future government review of the dividend rules for closely held companies may ultimately modify this position.
These new rules take effect from 1 April 2011. If you have an LAQC, you would be well advised to discuss it with us and/or your Accountants at your earliest opportunity. If your LAQC is running at a profit then perhaps no action need be taken, but if it is running “negatively geared”, you will almost certainly need to act to preserve the benefits.
If you wish to know more, please contact Ivan McIntosh on (09) 921 5026; email: firstname.lastname@example.org or Jeremy Goodwin on (09) 921 5002; email: email@example.com.