NZICA: LAQC proposals questionable

Monday, 31 May 2010

The proposals around the LAQC and QC rules to shore up the integrity of the tax system are questionable, says NZICA tax director Craig Macalister.

The NZICA will be submitting on these proposals and would appreciate any comments and contributions that members may have on how the proposals will affect members and their clients. Deadline for submissions on the issues paper is 5 July.

As part of the Budget process, Inland Revenue has proposed limiting the use of LAQCs to reduce the overall tax paid by property investors and others. The department's Policy Advice Division released for comment Qualifying companies: implementation of flow-through tax treatment, which makes the following proposals.

The distinction between a qualifying company (QC) and an LAQC will be removed. There will be only QCs that will be allowed only one class of share.

QCs will be taxed similarly to a limited partnership, not a company, with the income and losses flowing through to shareholders in a QC in proportion to their "effective interest" (generally a shareholder's voting interest).

A loss limitation rule will be imposed. Losses will be able to be claimed by a shareholder in a QC but the amount will be limited to the value of that person's investment in the QC. Excess losses may be carried forward and utilised when the shareholder's investment in the company increases.

Amounts derived from the QC will retain their character in the shareholder's hands; that is, capital distributions will be treated as a capital receipt by the shareholder and revenue distributions will be treated as income.

The dividend and imputation rules will not apply to a QC.

Shareholders in a QC will no longer be personally liable for the company's income tax when electing to become a QC.

A shareholder will be required to account for tax on disposing of their interest in a QC only if the value of the proceeds from the disposal exceeds the total net tax book value of their share of company property by more than $50,000. The same exceptions to this rule that apply to partnerships will also apply to shareholders in a QC.

There will be a deemed disposition and reacquisition at market value of the company's assets when the company ceases to be a QC. The shareholder will therefore be required to account for tax on the disposal of their share of the QC's property.

On liquidation of a QC a shareholder of a QC will be treated as having disposed of and reacquired all of their interest in the company at market value.

The QC will be required to file an IR 7 partnership income tax return.

There will be no tax costs associated with an existing QC transitioning into the new QC rules.

Comments from our readers

On 2 June 2010 at 4:01 am Mark Hubbard said:

All the government needed to do to fulfil it's policy ambitions was ring fence domestic rental losses not matter what the structure. To 'destroy' a whole legal structure that is used across all sectors is insane and unjust. I'm speechless at this attack on the QC and LAQC regime. Just for a start, my ma and pa farming clients who have restructured from partnerships into QC's to avoid all the partnership issues around the death of a spouse - esp around livestock issues - and for better estate planning, etc, now find they have to elect out of LAQC or QC regime or end up back where they started, a partnership. This attack on LAQC's will also be problematic in the dairy industry, and will also see to it, via the tainted capital gains issue, that dairy land owners will have often insurmountable hurdles helping sharemilkers they have a good relationship with into farm ownership, via retaining equity in related companies. And the irony is, I don't have a single client using an LAQC for a domestic rental operation. Given the small size of these operations, in most instances it was cheaper and more sensible (in absence of a comprehensive estate plan/Trust, etc) to simply run them as partnerships. With this and the ETS striking at their farming voting base, I can only wonder who is advising this National government so badly.

On 11 September 2010 at 1:56 am charm club said:

the structure.1charm clubdomestic rental losses not matter what schmuckAll the government needed to do to fulfil it's policy ambitions was ring fence

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