Fish hooks in LTC leg­is­la­tion

South Waikato News - - OPINION / KI O¯ KU NEI WHAKAARO -

Prior to April 1, 2011 a company set up as a Loss At­tribut­ing Qual­i­fy­ing Company ( LAQC) could pass losses out to share­hold­ers in pro­por­tion to shares held.

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

In an at­tempt to re­duce the tax ben­e­fits of LAQCs the Gov­ern­ment in­tro­duced Look- through Company (LTC) leg­is­la­tion to ap­ply from April 1, 2011.

The aim was to limit the tax ben­e­fits to tax­pay­ers of the eco­nomic loss they suf­fered.

The new LTC regime ap­peared to be a log­i­cal al­ter­na­tive to the re­pealed LAQC struc­ture, how­ever as time has passed, ‘ fish hooks’ have sur­faced.

The con­se­quences may not have been in­tended by the Gov­ern­ment, how­ever as ad­vi­sors we need to deal with them while await­ing leg­is­la­tion changes.

Some of the in­clude:

De­pre­ci­a­tion Re­cov­er­ies – Pre­vi­ously share trans­fers did not trig­ger de­pre­ci­a­tion

is­sues re­cov­ery and po­ten­tial tax costs. In cer­tain in­stances share trans­fers in LTC com­pa­nies can cause tax­a­tion payable with de­pre­ci­a­tion re­cov­er­ies.

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 avail­able to the share­hold­ers.

Ceas­ing to be an LTC – The company will cease to be an LTC if the num­ber of share­hold­ers in­creases to over five. There­fore a share­holder change could in­ad­ver­tently cease the LTC sta­tus.

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 oth­ers.

For­give­ness of Debt – Due to losses, many LTC com­pa­nies are in­sol­vent and owe money back to the 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. Grant Eddy, Di­rec­tor Coop­erAitken Ac­coun­tants in Mor­rinsville, Mata­mata and Thames

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