LAQC’s will be a “dead man walking”

Finance Minister Bill English today announced in the Budget that qualifying companies (QCs) and loss attributing qualifying companies (LAQCs) will become flow-through entities for tax purposes - similar to limited partnerships.

The LAQC and QC rules will be tightened from income years starting on or after 1 April 2011 to prevent people choosing to have losses deducted at their marginal personal tax rate but profits taxed at the lower company tax rate.

Shaw says the government has taken the right principled approach but there's a lot of difficulty in making it work.

He believes property investors will not want to use LAQC's going forward and that they will use straight forward partnership structures if they expect to have losses.

If they expect to make a profit he believes investors will use corporate structures and pay tax at the lower rate of 28%.

"LAQC's will be a dead man walking, they'll disappear as the government will find them too difficult and will end up getting rid of LAQC's altogether - that will be a real concern."

Comments from our readers

On 21 May 2010 at 2:08 am jeff berge said:

I have an LAQC and am a 99% shareholder with my wife owning the rest. This allows me to claim 99% of the losses as I earn considerably more than she does. Why would anyone in this situation not use an LAQC. If a partnership is used can the losses still be apportioned this way or are they claimed equally.

On 21 May 2010 at 11:11 am Charles said:

The LAQC can still achieve significant savings through offsetting losses at personal tax marginal rates, but any profits will also now be taxed at your personal tax rate. So in reality, LAQCs are no longer required because they fall in line with the personal income tax rates. So I suppose you keep the property as an LAQC/limited partnership whilst it makes losses, then convert it to a normal company to take advantage of the 28% company tax rate?

On 21 May 2010 at 4:45 pm Sean said:

I'm with you Jeff I didn't see or hear anything in the budget that changes the rules around shareholder equity stakes in LAQC's and I also see major advantage in maintaining the status quo as my wife and my salary ratios are similiar with me as the 99% holder and any tax losses attributed to the high income earners tax position.

On 22 May 2010 at 5:13 pm Song said:

As long as the LAQC is still making losses (bear in mind the depreciation may no longer be allowed for a deduction from 1/4/2011), the status quo still benefits you as 99% loss will offset your income at your marginal tax rate. However, if the company makes a profit, the profit will be 99% attributable to you and is taxed at your marginal tax rate. If you convert the LAQC to a normal company, then profit is taxed at 28%. If you convert it to a partnership, any profit/loss may have to be shared 50/50 between you and your wife. Hope this helps.

On 25 May 2010 at 11:14 am Tony said:

It's about time the property investors payed for the tax changes in the budget they have been on the pigs back for years. If you dont like it get out and let the govt.supply housing, thats us the tax payer the same people who bailed out the banks,leaking houses,finance deposit gaurantee,stimulated a dead economy with govt. spending it's about time we got our pay back, thanks Bill

On 30 May 2010 at 10:29 am bob said:

you seem to be missing capital dividens in your outlook so long as we can use laqc to move loss laqc's will always have a place refer to GRA.

LAQC’s will be a “dead man walking”

Property investors will not want to use LAQC’s going forward and they will use other structures instead according to Deloitte tax partner Mike Shaw, who is a member of the Tax Working Group.

Friday, May 21st 2010, 12:00AM 6 Comments

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