LTC - Calculating Initial Owners Basis

[ryal001]

On transitioning from an LAQC to an LTC, the Income Tax Act allows you to calculate your initial owners basis using the market or book values as at 31 March 2011.

The owners basis formula is:

investments − distributions + income − deductions − disallowed amount

Given that the definitions of all the formula items refer to the LTC rules, which didn't have any effect at 31 March 2011*, does this mean that, applying this method on transition you only need have regard to the "investments" component of the formula?

For example, LAQC with:

• 100 $1 shares
• One shareholder
• One property with historical cost $500k
• Shareholder personally guarantees $500k mortgage
• Book value at 31 March 2011 $450k
• Market value at 31 March 2011 $550k (but not supported by any professional valuation)

If using book value, the initial owners basis would be $450,100.

If using market value, the initial owners basis would be $500,100 (i.e. limited to the lesser of the initial cost/guarantee plus the value of the shares at the time they were acquired). However, you would presumably be at risk of the IRD claiming your valuation was not properly supported.

Does anyone know if this approach is correct?


* The other method on transition is to go back to the establishment of the LAQC and calculate the owners basis through the years until 31 March 2011, applying the LTC rules as if they were in effect all along.

[CJ]

Sounds like you have it pretty much right.

It is going to be a long time before the difference between $450k and $500k becomes important one would hope but I would get a valuation done if you ever expect to have that many losses.

One issue. YOu have a shareholder personal guarantee of $500k. I have heard inland revenue will check that you have personal assets worth $500k to support that. If you have transfered all your wealth to a trust for example, they are taking a hard line view that the guarantee is worthless and therefore you cant use it in your owners basis calc.

[ryal001]

Thanks. That's a good point about the personal guarantee.

[richard56]

Hi
Can I ask some more question about calculating the owners basis?
This is from the IRD guide.

Income: The owner’s share of income, including exempt or
excluded income, and any capital gains from the current and
any prior tax years that the company was an LTC.

1..So what if the company made a loss...would your income be $0 for the purposes of working out the owners basis?

and any capital gains from the current and any prior tax years that the company was an LTC.

2..So if your property increased by say $10,000 in value since you worked out last years owners basis does that mean your owners basis would increase by that $10,000... because their formula adds income to the investments

3..How to work out my "shareholder current account balance"
Would this be ...funds introduced by myself into the LTC plus value of shares?
So who works out what the 1000 shares my LTC has are worth?

Thanks
Richard

[Rosco]

Sorry i'm having a lazy day, but I will answer the last one.

Shareholders current account is the amount you have put into the company less anything you have taken out. It has nothing to do with the value of your shares! This figure should be on your companies balnce sheet.

Ross

[richard56]

Sorry i'm having a lazy day, but I will answer the last one.

Shareholders current account is the amount you have put into the company less anything you have taken out. It has nothing to do with the value of your shares! This figure should be on your companies balnce sheet.

Ross

Hi
Thanks for that info.

Does the "amount you have put in to the company" include loans that the company raised but you guaranteed?

I know that those loans make up part of your owner basis but are they part of your current shareholders account?

Thanks
Richard

[Wayne]

No - the loans that you guarantee are not part of the Shareholder Current Account.