LAQC proposals questionable: NZICA

As part of the Budget process, the Inland Revenue Department (IRD) 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.