Polson Higgs
LAQCs and Property Investment
As part of Budget 2010 the Government announced changes to the Qualifying Company (QC) and Loss Attributing Qualifying Company (LAQC) regime to make these entities flow-through entities.
Recently released draft legislation introduces a new look-through company (LTC).
The new LTC regime, to take effect from 1 April 2011, is intended to counter the perceived advantages of the current LAQC regime.
One perceived advantage was shareholders’ ability to access rental losses. However individuals could do this anyway simply by buying properties in their own name.
The key “mischief” that the government was attempting to remedy was the benefit gained from tax losses claimed at individual tax rates (39%/ 38% old rates), yet future income being taxed in the LAQC at company tax rates (33%/ 30% old rates).
The wider policy objective is also an attempt to move investment away from property. This is also evident in the removal of tax depreciation on properties from the 2012 income year.
How is the LTC regime going to work going forward?
For companies that elect into the LTC regime, both losses and profits will be taxed in the name of the shareholders, that is, at the shareholders’ marginal tax rates.
Similarly capital gains (which are non taxable) will be treated as earned by the shareholders directly.
So what does this mean - should companies remain ‘LAQCs’ (now LTCs)?
Making this call involves looking at the interaction of several complicated issues, and every situation is different. There are however a few pointers that may help with the decision.
Reasons to stay in:
- If the company makes substantial losses, the flow through nature of the LTC is ideal. Subject to certain limitations, losses are able to be offset against shareholder income.
- Capital gains are derived directly by the shareholders.
On the other hand, reasons to pull out may include:
- There is a deemed sale on change of shareholding or exit from the LTC regime. This may trigger depreciation recovery and therefore a tax cost to shareholders. This may be a problem if, for example, shareholders wish to transfer shares to a trust in the future.
- Removal of depreciation deductions may mean no further losses. This will impact shareholders as income will be taxable in their hands at their relevant marginal tax rates.
In some situations it is possible to restructure finance in shareholders’ names to achieve same result without being in the QC/ LTC regime.
Pending a review of the dividend rules, existing LAQCs may transition into “default QCs”. These entities cannot attribute losses and any profits made are taxed at company level. Capital gains can be passed out to shareholders as tax free dividends.
Another option available is for existing QCs and LAQCs to transition their business structure into a partnership, limited partnership or sole trader, with no tax cost. If this option is chosen, the steps required to transition would need to be considered further at the time the decision is made.
Making the decision as to remaining in or pull out of the LAQC/ LTC regime is by no means a simple matter. There are a lot of complicated issues to consider. It is recommended that all companies in this situation seek advice.
Frank Burgess
Partner, Taxation
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Last updated: 21st December 2010 | 4:08 p.m.
