LAQC / LTC reminder

[CJ]

Comments from my accountant regarding LTCs.
1. Applies for 5 shareholders or less(which cannot include another company)
2. Must be a NZ resident.
3. Every shareholder has equal rights.
4. No end of year shareholder salaries - all shareholders employed in the business must have employment contracts and be paid wages with PAYE deducted.
5. All income and expenses are distributed to shareholders but there is a cumulative "loss limitation"
6. Must continue with eligibility rules at all times during the year.
7. As there is more management required, it will be more costly to run.
Suitable for companies expected to make losses or capital gains eg, start up business

1. dont forget related party rules which means in a family context, you can have much more than 5 shareholders
4. but if the business is passive, (ie. rental properties or share investments) then a salary to a shareholder is non deductible (but probably still taxable in their hands???)
7. not sure if there will be any additional management. Maybe initially while everyone figures it all out but going forward it should be the same. Until you do something dumb like try and change shareholdings - then it is an accountants nightmare and payday, all at the same time.

[muppet]

Thanks CJ.
Lots to think about.
Having a talk to my accountant next Monday.

[Wayne]

still doesn't fix my revolving credit issue. I can see my holiday money getting stuck in the 'company'. Maybe if I started another company (normal company) that had the sole purpose of loaning money (at no interest) to my LTC (like I do with the shareholder current account) then the LTC could borrow money (revolving credit) to pay back my lending company when it asked. The lending company makes no profit or loss so no foul there??

[lissie]

still doesn't fix my revolving credit issue. I can see my holiday money getting stuck in the 'company'. Maybe if I started another company (normal company) that had the sole purpose of loaning money (at no interest) to my LTC (like I do with the shareholder current account) then the LTC could borrow money (revolving credit) to pay back my lending company when it asked. The lending company makes no profit or loss so no foul there??

Wayne - I think you (and I) are OK - I got this from my experienced accountant:

When I asked him:
" As we have no personal debt we have made it our practice to put monies set aside for personal tax and ACC into our company's revolving credit facilities . When we need to withdraw these Shareholder's funds to pay IRD - the company's interest cost will increase - is this increased interest expense still an deductible expense for the companies?"

his answer:
"the mortgage interest will be deductible still. Effectively you are borrowing money to repay debt that is owed to yourselves. This is just replacing one form of debt with another."

I'd suggest that you get advise (in writing) from your accountant as well though

[CJ]

his answer:
"the mortgage interest will be deductible still. Effectively you are borrowing money to repay debt that is owed to yourselves. This is just replacing one form of debt with another."

I'd suggest that you get advise (in writing) from your accountant as well though

With an LTC, how can you have a debt to yourself, you are one and the same.

Writen advice from your accountant is only as good as their indeminity insurance.

I will ask my expert and see what they say.

[lissie]

With an LTC, how can you have a debt to yourself, you are one and the same.

Writen advice from your accountant is only as good as their indeminity insurance.

I will ask my expert and see what they say.

Well its not really yourself - its still a company in terms of limited liability and other legal stuff I thought the look thru aspect only relates to tax - the company is borrowing from the directors or from the bank - I think its still separate.

If it was really the same I'd have to let the banks know that we are going to a LTC - and we don't as far as all the advice I've read - because they (the bank) is still lending to the same company they have always lent to - not to me personally

Interested to hear what your accountant says

[CJ]

Well its not really yourself - its still a company in terms of limited liability and other legal stuff I thought the look thru aspect only relates to tax - the company is borrowing from the directors or from the bank - I think its still separate.

So for all purposes except tax, it is a company, but for tax, you are borrowing from yourself.

Haven't herd back yet.

[CJ]

Lissie - I have seen something now that may support your view. The firm in question (not the one I use) sought confirmation from IR as they new there was conflict in the accounting fraternaty. I have not seen the full detail to confirm whether it supports your specific facts.

Facts
It confirmed if you operate as a sole trader (electrician) and decide to move to an LTC, the company can borrow $100k to puschase the business and that debt will be deductible, not withstanding that on a 'full' look through treatment, you have bourght from yourself and therefore have actually use that loan to retire personal debt, not to purchase business assets.

Applying the principle, this should also apply where your LTC/LAQC has bought the family home and now rents it to tenants (not yourself) which was an area of concern.

Likewise, anyother loans between a company and individual should also work.

Now we just need IR to actually confirm to the public what they say.

[Wayne]

now all we need is the full piece of paper. Think IRD will write a clarification in the next week?

[CJ]

Lissie - I have confirmed and my guy agrees with your guy. Transactions between yourself and your LTC are not disregarded even though it is a look through entity.

[lissie]

Sweet CJ - just added up how much future tax is sitting in the LaQC/LTC at the moment - it would be a pain to have to pull it out!

[Bob Kane]

Facts
It confirmed if you operate as a sole trader (electrician) and decide to move to an LTC, the company can borrow $100k to puschase the business and that debt will be deductible, not withstanding that on a 'full' look through treatment, you have bourght from yourself and therefore have actually use that loan to retire personal debt, not to purchase business assets.

Applying the principle, this should also apply where your LTC/LAQC has bought the family home and now rents it to tenants (not yourself) which was an area of concern.

Likewise, anyother loans between a company and individual should also work.

Now we just need IR to actually confirm to the public what they say.

CJ - does the above quote effect this post from Rosco?

In the past an LAQC can borrow to repay its shareholders current account, the interest on these borrowing would be deductible.

In an LTC, most likely the interest in this situation would not be deductible.
Ross

[Bob Kane]

Just bumping this in case CJ or Rosco haven't seen it (had a few glitches when I first posted it) - I'd like someone to comment on it if they'd be so kind.

[CJ]

HI Bob - I had missed you post so good you did bump it.

The answer is no one is sure. From what I have heard, IR will be applying a 'different hats' approach. Therefore if you clearly document and account for, which you will because it is still a company at law, it should be ok.

But, IR still haven't published anything on this. My guess is they are struggling to get the words right as once they publish, we will rely on it.

Until IR are clear on it, I wouldn't trust it so would be repaying existing shareholder loans quickly (ie, those created while the company was a separate tax entity) and not do new shareholder loans once you have elected into the LTC regime.

Rosco - views?

[foss]

Hi CJ

Would be interested in Rosco's thoughts too, notwithstanding uncertainty

But I am certainly this week repaying my (existing) shareholder loans and substituting with loan from Trust. Trust has Corporate Trustee, so my thinking is degree of separation is greater than self (shareholder) and should not hopefully have the future deductibility issue if (worse case) it turns out that way. And from asset protection perspective is better anyway.