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Why form an LAQC?
Loss Attributing Qualifying Company
A Loss Attributing Qualifying Company (LAQC) is simply a normal company that has elected to be an LAQC. With a LAQC company any losses can be allocated to individual shareholders to offset against their personal income.
We recommend rental properties are held in an LAQC company. This can have a dual benefit, tax losses can be assigned to the shareholders, it can isolate your investments which is especially useful if you are a share trader or buying property and could be deemed by the IRD to be a trader or in the business of speculation. If you are deemed to be a trader all capital gains on sale will be taxable as income.
With an LAQC the larger income earner can own all the shares and have all the losses claimed at the higher tax rate, which may amount to many thousands of dollars in tax refunds. Furthermore, you can sell the shares to a family trust without the depreciation that you have claimed on a rental property being claw back by the IRD as the ownership of the property (the LAQC company) has not changed only the shareholding of the company.
We recommend waiting until the LAQC company is making a profit and then change it to a "non LAQC company" before transferring into a family trust as there are other taxation issues to consider. If a LAQC company is owned by a family trust all dividends have to be paid out to the beneficiaries and cannot be retained by the trust. We recommend discussing with your accountant or financial adviser before changing.
For example
Assume your salary is $90,000 and you pay tax via PAYE on this income. Now if you own several rental properties that make a total loss of say $20,000 you would then pay tax on the net gross income of $70,000. Income above $70,000 is taxed at 39%, therefore you will receive a refund of $7,800. If your investment properties are owned by either a family trust, or a company that was not a LAQC you cannot offset this loss against your personal income but you can off-set this against your company or trust's income. You need to wait until these entities are making money before you get the benefit of the loss, but you can carry the loss forward.
IRD Criteria for becoming an LAQC (summarised):
- Must not be a foreign company;
- Must have fewer than 5 shareholders;
- All shareholders and directors must have elected that the company become an LAQC and not have revoked this status;
- The directors must have elected to become personally liable for their share of any income tax not paid by the company (herein lies quite a big difference between regular companies and LAQC's);
- All shares in the company must carry the same rights
LAQC or Family Trust?
Transferring your assets to a family trust means you don't own the assets anymore, the family trust does - this is important to protect your assets. The taxation issue for losses in a family trust works in a similar way to losses in a regular (non-LAQC) company, the losses can only be carried forward and offset against future income rather than receiving immediate taxation relief or refund.
The family trust is still a good ownership vehicle if you are buying highly positively geared properties that will either not make a loss or will make very minimal losses prior to becoming profitable.
If your intention is to make a capital gain and pay tax on this capital gain then you should hold your properties in a separate company to avoid all your other investments being tagged and ending up paying tax on the capital gains. You do need to be cautious due to "The Associated Persons Rule" and amendments. You should seek expert advice when in doubt.
How do I elect for the company to become an LAQC?
Either go to your accountant who will arrange this for a small fee, or download the form directly from the IRD; for the "Qualifying company or loss attributing qualifying company elections Form IR436", click here.
Pitfalls to changing from an LAQC to a Non-LAQC Company
If you change the status of your company from LAQC to a non-LAQC any accumulated tax losses cannot be transferred.
If you change the share holding in your LAQC company by more than 35% you automatically loose your LAQC benefits but you still need to notify the IRD.
If 25% or more of the share holding of any company is owned by a non NZ resident, the company is required to file audited accounts. The fine for not doing so can be up to $100,000.
Also check out
Business Succession Planning
Directors Liabilities
Shareholder Dividends