LAQC / LTC reminder

[Rosco]

LAQC’s cease from 1/4/11
Look Through Companies (LTC) start from 1/4/11 and many investors will be changing over to these.
If you have not been to a property accountant seminar on LTC's or meet with a property accountant, I suggest you organize a meeting with them before 31/3/11 as there are situations where action is needed before 31/3/11. Your property accountant will most likely charge you for this time.
If you are unable to meet with one, another option is to email or ring your property accountant. Just be aware there will still be a cost to this in most cases.
Some examples of situations where a change pre 31/3/11 might be worthwhile
- Properties generating taxable profit (excluding building depreciation)
- Looking at selling investment properties
- Received inheritance or other money that will be used to reduce rental losses
- Worried about asset protection
- Large shareholder current account
- Looking at personal home becoming a rental, and buying new personal home
- Anything that will reduce the expenses claimable in the LAQC (such as debt being paid down, significant rental increases etc
In most cases the property accountant needs to know your circumstances and can’t recommend the best way forward without speaking with you or meeting with you.
The reason why I recommend using a property accountant, is that most accountants don't specialise in this area. They may know a little bit about the changes, but most likely have just been to a course/seminar in February or March, so have only been thinking about this issue for a month or less.
Whereas property accountants have been watching the changes for a long time, and would have considered a lot more of the options and possibilities to use the changes to our clients advantage.
Ross

[jedimaster]

Good post Ross.

I have found that in the vast majority of cases previously negatively geared properties will start to be break even to profitable once depreciation is removed. In many of these cases people are choosing to transition to an LTC and sell the shares to their Family Trust pre 1 April. Gives better asset protection and options to stream profits out to beneficiaries on lower tax rates.

As always, talk to your accountant for advice.

[Keithw]

Thanks Rosco
most of the situations you mention are intuitively obvious, but could you please explain the situation around - Large shareholder current account

it was my understanding that though the LTC limits the use of losses by the shareholders to the value of the money invested, or gauranteed by them - a large current account was actually a good indication of what you had invested. Is there another side that needs to be considered?

[Rosco]

Yes.

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.

So if there is a large shareholder current account
- Good for loss limitation, not that this is an issue for 99% of investors as they personal guarantee loans
- Bad for drawing money out, and gaining tax deduction.

Ross

[Bob Kane]

Ross - so what happens to the large shareholders current account?
Can't we access/use it any more?

When you say 'most likely' - is that no-one knows the answer and you're guessing or IRD haven't spelt it out yet or some other unknown is involved?

[Keithw]

Bob, my expectation from Ross's post above was that the account is still accessible but could only be repaid through company profits (bearing in mind that an LAQC is not generally profitable) or through the sale of a property etc, ie from money held rather than borrowing for the purpose of repaying the shareholders current account. If borrowed, the purpose is not for the creation of income, therefor not deductable - even though the original "Loan" from the shareholders was for the purpose of creating income.

So even if you borrow to purchase more property, with the intention of overborrowing to repay some proceeds to the shareholders, that proportion wouldnt be deductable.

Is that correct Ross ?

[Wayne]

can you then make the shareholder current account a loan? Borrowing money from one source (bank) to repay loan from another (old shareholder current account) and claim the interest deduction??

[Keithw]

Yes I was wondering the same thing.
The other side of that is, does it (converting current account to loan- assuming it is allowed) reduce the amount you have "invested" in the business from a limitation of losses point of view under the LTC rules ?
I presume the Shareholders current account is the obvious way to determine your "investment", & for many, the amount they have personally gauranteed probably overshadows the current account amount, but still need to be considered I guess.

The practicalities of raising extra loans on a loss making entity also come into play, ie if company has only 20% equity in its properties, then raising more to repay Shareholders is not going to be practical until that equity & servicability improve, which may be many years in the current "zero capital growth " condition

[foss]

Ross

I'm also intrigued with the shareholder current account interest deductability issue for LTC. I appreciate the prob you are highlighting. I believe the issue arises only with an LTC, because the LTC is seen for tax purposes as the same person as the shareholder?

In my circumstance the benefit in the shareholder current account is assigned to the Trust. Is one solution to actually repay the LAQC shareholder current account before LTC election and then my Trust relend to LAQC (no net cashflow to LAQC)
ie. LAQC repay > shareholder > Trust > LAQC

As described above the LAQC loan is then owed to Trust (separate legal entity) before LTC election. If loan repyable on demand to Trust is repaid at some point, would interest then be deductible?

Thanks

[lissie]

Yes.

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

Hmm are you saying that we might be in trouble if we keep on parking provisional tax in our LAQC's revolving credit to reduce costs and then pull it out when we need it to pay IRD? Would a LTC or a QC better for this scenario?

Should we remove this money from the LAQC account before the 31st March to be on the safe side?

[Wayne]

Yes.

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.

Is the reason for this the differance between the LAQC and LTC for tax treatment - the former attributed losses to the shareholder whereas the latter is totally transparent for a shareholder? This is potentially a big 'gotcha'.

[Keithw]

I think you are a little confused there Lissie,
He is not talking about the day to day account of the LAQC
he is referring to the notional account that is the amount the shareholder has invested in the company- not the $1000 shares, but all the cash you have piled in to support it.

[foss]

Wayne

you are correct on the potential gotcha. Not all is known yet, but often can be ways around these things.

Equally though is uncertainty as to a QC with its benefit of tax free capital distributions. Until the dividend rules are finally reviewed & finalised (timing uncertain) we won't know if there is any impact to this current benefit.

[Wayne]

kinda make it hard to know which way to turn

[Rosco]

Hi all,

I'm saying it is an area to watch, and yes another part to the decision to become an LTC or not.

Assigning the current account is one option around it.

Ross