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Property investors learn new LAQC rules

Changing to a look-through company is one of the alternatives for investors under new proposed tax rules.

Sunday, October 17th 2010, 12:00AM

by The Landlord

Draft legislation to implement the changes to qualifying companies was released late last week.

The changes as forewarned in the Budget include:

  • Introduction of  new flow-through income tax rules for closely-held companies.
  • Allowing existing QCs and LAQCs to transition into the new flow-through tax rules or change to another business vehicle such as a limited partnership, without a tax cost.
  • Allowing existing QCs and LAQCs to continue to use the current QC rules without the ability to attribute losses (until a review of the dividend rules for closely-held companies has been completed).

The new rules create a new tax entity, called a look-through company (LTC). Shareholders of a closely-held company can elect to become an LTC.

An LTC's income, expenses, tax credits, rebates, gains and losses are passed on to its shareholders, in accordance with their shareholdings in the company.

The LTC retains its identity as a registered company, and will keep its corporate obligations and benefits under general company law, such as limited liability.

Look-through treatment applies for income tax purposes only; the shareholders of an LTC are regarded as holding the LTCs assets directly, and carrying on the activities of the LTC personally. Thus, in general, a sale of shares in an LTC is treated as a sale of the underlying assets.

The ability for a shareholder of an LTC to claim losses will be limited to " the extent the losses reflect their economic loss" This will be the amount of their investment in the company including share capital, shareholder's current account plus debt they have guaranteed. That last inclusion should reassure property investors who generally guarantee loans over properties that will be owned by the LTC.

Any losses a shareholder cannot use are carried forward and may be used by the shareholder in later years.

The fact that the Government has yet to review the tax rules for dividends of QCs will leave many uncertain as to what will be the best way forward.

The options include:

  1. Continue as a QC, without the ability to attribute losses This is the 'default' option for all existing QCs and LAQCs.
  2. Be taxed as an ordinary company (need to revoke your LAQC election).
  3. Be taxed as a look-through company (LTC)
  4. Become a limited partnership, an ordinary partnership, or sole trader. You will need to restructure your business and either make the company non-active or wind it up.

The legislation for the new rules is expected to be enacted before the end of this year with the new regime taking affect from 1 April 2011.

 

 

 

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