Hi All
Since announcing in May that the LAQC regime was going to be the subject of an overhaul the property investment community has been anxiously awaiting the Government’s follow-up to the Issues Paper released at the time. On Friday 15 October 2010 draft legislation was released. As at the time of writing all practitioners, including myself, were poring over the draft to get to grips with the new regime. The objective of this article is to provide an overview of the proposed rules.
Recap
In May sweeping changes to tax rules were announced with the ones of most significance to property investors being the prohibition on claiming depreciation on buildings after the end of the 2011 financial year and drops in personal income tax rates. At the same time the Government announced that they wished to review the current tax rules in relation to LAQCs. In the Issues Paper it was proposed that LAQCs would be treated as limited partnerships for tax purposes with the three main consequences of this being:
With draft legislation now available it is clear that the Government is committed to implementing these changes and the outcome is largely as set out in the original Issues Paper albeit that the route chosen is simultaneously more complicated, but more friendly for taxpayers.
The headline of the draft legislation could well be “LAQCs are gone”. From the 2011/2012 income year existing LAQCs will no longer have the ability to attribute their losses to shareholders which effectively represents the end of the LAQC regime. Before readers with LAQCs that are going to produce tax losses post 2011 throw their hands up in despair let me introduce you to the new LTC structure.
The new LTC rules (LTC stands for “look through company”) are essentially the same as the proposed rules in the Issues Paper released in May. In other words an LTC is a company that will be taxed as a limited partnership. All profits and losses of an LTC will be attributed to shareholders in accordance with their shareholding interests. If losses are produced the shareholders ability to claim those losses and offset them against other forms of income will be restricted if the losses exceed what is known as their “membership basis”. Broadly speaking the membership basis is as noted above with the confirmation that shareholder loans are included in the calculation. The sale of shares in an LTC will be treated as the sale of the underlying assets so that potentially issues like depreciation recovery will arise. In saying that it is noted that there are thresholds and exceptions as to when there will be a tax cost.....
Please read my blog on this to get the rest. Q & A Welcome in the Ask GRA A Free Question thread.
Since announcing in May that the LAQC regime was going to be the subject of an overhaul the property investment community has been anxiously awaiting the Government’s follow-up to the Issues Paper released at the time. On Friday 15 October 2010 draft legislation was released. As at the time of writing all practitioners, including myself, were poring over the draft to get to grips with the new regime. The objective of this article is to provide an overview of the proposed rules.
Recap
In May sweeping changes to tax rules were announced with the ones of most significance to property investors being the prohibition on claiming depreciation on buildings after the end of the 2011 financial year and drops in personal income tax rates. At the same time the Government announced that they wished to review the current tax rules in relation to LAQCs. In the Issues Paper it was proposed that LAQCs would be treated as limited partnerships for tax purposes with the three main consequences of this being:
- LAQC profits would be attributed to shareholders (as well as losses). Perhaps unsurprisingly the IRD had expressed concern that the existing tax rules allow an arbitrage in that shareholders of a loss making LAQC can offset losses against their personal income where the tax rate has historically been as high as 39%, whereas they could hold shares in a profit making LAQC and have the profit taxed at the lower company tax rate (historically 33%, now 30% and moving to 28% from 1 April 2011).
- Losses able to be claimed by shareholders to be limited to the shareholder’s “investment“ in the LAQC. Broadly speaking this was proposed to include capital of the company, together with retained profit and any company debt guaranteed by the shareholders. Shareholder loans were not included and many submissions were subsequently fielded on this point. The objective here was to limit the ability of the shareholders to claim losses that exceed their economic exposure to the activities of the LAQC.
- Shareholders to be regarded as owning the underlying assets of the company for tax purposes. This meant that upon disposal of shares there would be a disposal of the underlying assets potentially triggering depreciation recovery or tax on any “tainted” gains through association to dealers, developers etc.
With draft legislation now available it is clear that the Government is committed to implementing these changes and the outcome is largely as set out in the original Issues Paper albeit that the route chosen is simultaneously more complicated, but more friendly for taxpayers.
The headline of the draft legislation could well be “LAQCs are gone”. From the 2011/2012 income year existing LAQCs will no longer have the ability to attribute their losses to shareholders which effectively represents the end of the LAQC regime. Before readers with LAQCs that are going to produce tax losses post 2011 throw their hands up in despair let me introduce you to the new LTC structure.
The new LTC rules (LTC stands for “look through company”) are essentially the same as the proposed rules in the Issues Paper released in May. In other words an LTC is a company that will be taxed as a limited partnership. All profits and losses of an LTC will be attributed to shareholders in accordance with their shareholding interests. If losses are produced the shareholders ability to claim those losses and offset them against other forms of income will be restricted if the losses exceed what is known as their “membership basis”. Broadly speaking the membership basis is as noted above with the confirmation that shareholder loans are included in the calculation. The sale of shares in an LTC will be treated as the sale of the underlying assets so that potentially issues like depreciation recovery will arise. In saying that it is noted that there are thresholds and exceptions as to when there will be a tax cost.....
Please read my blog on this to get the rest. Q & A Welcome in the Ask GRA A Free Question thread.
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