Await­ing changes

Matamata Chronicle - - Rural Delivery - By GRANT EDDY

Be­fore April 1, 2011 a company set up as a loss at­tribut­ing qual­i­fy­ing company ( LAQC) could pass losses to share­hold­ers in pro­por­tion to shares held.

The op­tion let tax­pay­ers off­set losses from their LAQC ac­tiv­ity, with other in­come such as wages, and re­duce in­come tax com­mit­ments.

In an at­tempt to re­duce LAQC’s tax ben­e­fits, the Gov­ern­ment in­tro­duced look­through company (LTC) leg­is­la­tion to ap­ply from April 1, 2011.

The new LTC regime ap­peared to be a log­i­cal al­ter­na­tive to the re­pealed LAQC struc­ture but ‘‘fish hooks’’ have sur­faced and as ad­vis­ers we need to deal with them while await­ing leg­is­la­tion changes.

Some of the is­sues we aware of in­clude:

De­pre­ci­a­tion

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Re­cov­er­ies

Pre­vi­ously share trans­fers did not trig­ger de­pre­ci­a­tion re­cov­ery and po­ten­tial tax costs. In cer­tain in­stances share trans­fers in LTC com­pa­nies can cause tax­a­tion payable with de­pre­ci­a­tion re­cov­er­ies. Also, any re­vo­ca­tion of the LTC sta­tus in the fu­ture will cause de­pre­ci­a­tion re­cov­ery.

Loss of Cor­po­rate Tax Rate

LTC com­pa­nies are good for pass­ing losses out of the company to the share­holder, how­ever prof­its are also dis­trib­uted to the share­hold­ers. There­fore the share­holder could end up pay­ing 33 per cent tax in their own name in­stead of the company rate of 28 per cent.

Lim­i­ta­tions of Losses

With losses limited to the share­hold­ers eco­nomic loss, losses gen­er­ated by the company will not al­ways be avail­able to the share­holder. A de­tailed cal­cu­la­tion needs to be com­pleted each year al­low­ing for such fac­tors as share­hold­ing, funds in­vested in the company and guar­an­tees made.

Share Trans­fers

Care is needed with share trans­fers to en­sure part- year losses are not for­gone or tax trig­gered on de­pre­ci­a­tion re­cov­er­ies.

Salaries

Un­der an LTC, share­holder salaries need to be planned in ad­vance and paid dur­ing the year.

Loan guar­an­tees

If a non- share­holder guar­an­tees the company, this po­ten­tially lim­its the loss al­lo­ca­tion to share­hold­ers.

Ceas­ing to be an LTC

The company will cease to be an LTC if the num­ber of share­hold­ers ex­ceeds five.

Unau­tho­rised

Ceas­ing

Although all share­hold­ers are re­quired to ap­prove a re­vo­ca­tion, only one share­holder needs to elect with the IRD, there­fore there is po­ten­tial for one share­holder to re­voke the LTC elec­tion with­out the knowl­edge of the other share­hold­ers.

For­give­ness of Debt

Due to losses, many LTC com­pa­nies are in­sol­vent and owe money to share­hold­ers. Although not in­tended in the leg­is­la­tion, there are con­cerns that IRD will treat any write-off of money owed to the share­hold­ers as a tax­able trans­ac­tion, with the share­hold­ers pay­ing in­come tax on the debt.

Exit Strat­egy

To achieve the best out­come con­sider a strat­egy prior to exit.

Over­all there are pos­i­tives and nega­tives to LTC struc­ture use but con­sid­er­a­tion needs to be given on the po­ten­tial im­pli­ca­tions of the new LTC sys­tem as more is un­der­stood.

If you have any ques­tions re­gard­ing the op­tions un­der the LTC regime or how to man­age your ex­ist­ing LTC please con­tact the team at Coop­erAitken.

– Grant Eddy is a di­rec­tor at Coop­erAitken Ac­coun­tants.

Grant Eddy

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