The curtain has (mostly) fallen on the widely-used Loss Attributing Qualifying Company structure which was repealed from the end of the 2011 tax year (March 31, 2011, for most LAQCs). This, combined with the grandfathering of the QC regime and introduction of Look Through Companies (LTCs) from April 1, 2011, means that shareholders in LAQCs/QCs have to make some choices soon.
Although this outcome has been inevitable since Government announcements in the May 20 Budget last year, the legislation was only passed on December 20, 2010, so the real question is whether the approximately 60,000 QCs/LAQCs in New Zealand are ready to respond to this change.
Certainly, Chartered Accountants around New Zealand have been learning about the options available, and are talking to their clients about such.
These options range from doing nothing (and become/stay a QC), electing to become a LTC, or transitioning to a partnership/limited partnership/sole tradership structure.
Each of these options have various/different benefits and downsides, so this is a choice that must encapsulate the taxpayer's particular circumstances and plans for the future.
The new LTC regime allows shareholders direct access to losses from the underlying company in most circumstances (albeit there are some limitations that can apply) and unfettered access to company reserves tax free, but it is a complicated regime that needs careful management.
It essentially deems the shareholders to be undertaking the business of the company themselves (ignoring the company for income tax, but not for other purposes such as GST, FBT, PAYE, financial reporting and Companies Act etc).
The Government has provided a detailed set of transitional rules about these possible scheme (LTC) or structural changes for QCs that are generally tax friendly, but the changes to partnership/limited partnership/sole tradership structures do require actual transactions, and bear some risks around timeframes.
A decision to move away from the QC format to one of the above options can be made in either the 2012 or 2013 tax years (election within first six months, albeit effective from the first day of the relevant year).
Although each of the alternatives do have some benefits in certain circumstances, given that many former LAQCs will cease to be loss making due to the removal of depreciation claims on buildings, it is my expectation that the vast majority of QCs/LAQCs as at March 31 will simply be QCs in the future.
Notwithstanding this, if you are a shareholder in a QC/LAQC, you should talk to your tax adviser soon about the options best suited to your circumstances.
• Scott Mason is a Principal of Taxation at accounting firm WHK Otago.
