LAQC Changes 3 08 Dec 2011
The May 2010 Budget contained some initial indications of what to expect from the changes to the LAQC rules. The law has now been finalised, and introduces look through companies ("LTCs") as a new concept. This short update points out some of the differences that result from the introduction of LTCs. For background on the changes, listen to/read our interview with Craig Macalister from the New Zealand Institute of Chartered accountants on the LAQC changes.
We have previously, and on our blog, given some extensive coverage to the LAQC changes that were confirmed by Parliament before Christmas. In this article we briefly summarise the new look through company ("LTC") rules that were introduced.
What is a Look Through Company
An LTC is a company that is effectively disregarded for income tax purposes. The Income Tax Act looks to the owners rather than the company as the "person" to tax. The treatment applies only for tax purposes, and for general law purposes all the same rules that apply to a normal company apply. It is generally only available where there is a small number of shareholders.
How are LTCs treated for tax purposes?
- LTCs are flow through for tax purposes. That means, that generally speaking, the shareholders are taxed as if they were the owners of the business. However, there are some important exceptions.
- The first major exception relates to situations where the LTC makes losses. In that case specific loss limitation rules apply. These are detailed, and not covered in this article.
- The second major exception is that the LTC is still treated as a separate company for the purposes of GST, PAYE and certain administrative or other withholding tax purposes.
- There are other important rules as well that deal with entry and exit from the regime, as well as more detailed rules that are not discussed here. For example, establishing how many shareholders there are to meet the shareholding requirements.
When do the rules apply?
The LTC rules are available for income years starting on or after 1 April 2011. However, the IRD must receive the election before the start of the income year in which the company wishes to be an LTC. Therefore, for ordinary companies wishing to become an LTC, make sure the election is filed on or before 31 March 2011, if you have a standard balance date of 31 March. There are special transitional rules for qualifying companies, who will have till 30 September 2011 to elect into the LTC rules with effect from 1 April 2011. However, some other conditions apply here and care should be taken to meet all of these in good time.
Where can I find more information?
The IRD Policy Advice division has provided a very useful guide on the changes which can be accessed here.
Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.
Please contact Grant Adams at Parry Field's Christchurch office (348 8480) for help with tax matters. Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached. Therefore, please don’t rely on this as legal advice.