Look Through Company (LTC)
The Look Through Company regime came into existence on 1 April 2011. The origins of the LTC regime can be traced back to the Government’s budget announcement of May 2010 where they announced an overhaul of the Loss Attributing Qualifying Company (LAQC) regime of the time. In particular, the Government was concerned with some of the aspects of the LAQC regime including:
- Losses were able to be attributed to shareholders and claimed personally at personal tax rates which could have been as high historically as 39%, but profits were able to be trapped in the company and taxed at the company tax rate which was either 33% or 30% at the time;
- There was no cap on the amount of losses able to be claimed by a shareholder of an LAQC;
- Shareholders of an LAQC were able to take advantage of tax losses that might be funded through debt, but then not suffer any corresponding remission income if the debt happened to be written off after the LAQC election was revoked;
- There were also concerns around the complexity and the rigid nature of the LAQC election rules.
Key Elements of the LTC Regime
The key outcomes of a company having LTC status are as follows:
- The company is transparent for tax purposes. This means that tax profits or losses that would ordinarily be returned by the company are in fact returned by the shareholders in proportion to their shareholding. From a technical perspective, the shareholder is regarded as having derived the income and incurred the expenditure of the LTC.
- There are very complex loss limitation rules in place that seek to limit the amount of tax loss a shareholder of an LTC can claim to the extent of their investment in the LTC. The rules complexity derives from the complicated formula that one must apply in order to work out what a shareholder’s owner’s basis is. This is the description of the exposure that a shareholder has. Broadly speaking, the principle is to ensure that if the most a shareholder of an LTC can lose is $100, then the most they should be able to claim from a tax perspective is $100.
- The movement of shares in an LTC is regarded as the movement of the underlying property. This means that if the LTC owns revenue account property there may be a taxable gain on movement of the shares. Further, if the LTC owns depreciable property there may be depreciation recovery. That said, there are exemptions and de minimis thresholds.
- As an LTC is a disregarded entity for tax purposes, some of the rules that ordinarily apply to companies do not apply to LTCs. For example, shareholders can not draw shareholder salaries that are exempt from PAYE. Furthermore, there are restrictive rules around when even a PAYE salary can be claimed for tax purposes in an LTC.
- Aside from tax, an LTC is just an ordinary company. This means that from all other legal perspectives you have a company with limited liability and subject to the ordinary company legal framework.
Requirements of an LTC
In order for a company to obtain LTC status there are some base requirements. They are as follows:
- There has to be five or fewer shareholders. As with many elements of the LTC rules this in itself is not straightforward as there are aggregation rules that allow certain related shareholders to count as one shareholder.
- All shareholders of an LTC must be natural persons, Trusts, or other LTCs.
- An LTC election needs to be filed within the appropriate time frame. This varies depending on whether the company is new, existing, or has QC status and is transitioning during the transition period into LTC status.
- The company cannot be regarded as a foreign company. This means that the company not only has to be tax resident of New Zealand under domestic legislation but it also needs to retain that tax residency in New Zealand after the application of any relevant double tax agreement.
Up until 30 September 2012 there is a window of opportunity to convert companies that were LAQCs where there has not been any conversion undertaken. Where a company that was previously an LAQC or QC prior to the implementation of the new rules on 1 April 2011 has not made any election to either enter the LTC regime or apply the transition rules that allow conversion to sole trader or partnership structures, there is a second window of opportunity until 30 September 2012 to undertake such actions. Broadly speaking, if you have a QC that did not make any transition during the first window of opportunity, there are four options that can be pursued:
- You can do nothing, which means the company remains a QC.
- You can transition into the LTC regime by filing an election prior to 30 September 2012.
- You can revoke QC status and have the company revert to being an ordinary company for tax purposes.
- You can transition by moving the assets and liabilities of the company into the shareholders hands as a sole trader or partnership. To do so an election needs to be filed by 30 September 2012 and the transfer accomplished before the end of the financial year.
In summary, the LTC rules are relatively complex but offer a useful tax structure for a wide range of potential uses including holding loss making property investments, carrying out joint venture business activities between two to five business partners, cross border investment where an ordinary company structure might give rise to two layers of taxation, (i.e. once at company level and once at shareholder level) etc.
For more information and to organise a review of your affairs with respect to Look Through Company and LTC changes, please contact us.
Gilligan Rowe + Associates
09 522 7955