LTC Regime – Tomorrow’s Issue, Not today’s

Tuesday 19th October, 2010

media release

available for immediate release

LTC Regime – Tomorrow’s Issue, Not today’s

On Friday the Government have released the much anticipated legislation in relation to the treatment of Qualifying Companies (“QCs”) and Loss Attributing Qualifying Companies (“LAQCs”).

While many practitioners anticipated modification of the existing regime, the legislation has confirmed the creation of a new “Look Through Company (“LTC”) regime.

The new LTC regime will take effect from the first income year beginning on or after 1 April 2011. For those taxpayers with early balance dates (October 2010 to February 2011), any transition will not occur until the 2012 income year.

Those LAQCs and QCs with a 31 March balance date or later, have until six months after the start of their 2012 income year to elect for the change to take effect in the 2012 year. For example, an LAQC with a 31 March balance date can elect up to prior to 30 September 2011 to be an LTC from 1 April 2011.

For existing QCs and LAQCs, the current temptation is to convert to LTCs. However, given the date for elections, the differentiation from the existing LAQC/QC rules and the uncertainty in relation to the application of the legislation, we recommend any taxpayer thinking of transitioning to an LTC should hold off doing anything in the meantime to ensure they fully understand both the current and the future implications of the LTC regime.

One issue we have at present is that the legislation as drafted does not achieve much of what it is suggested it should do (in the commentary). This creates significant uncertainty for taxpayers, and is one reason why we consider patience is the best course of action, at least until the legislation is finalised in November/December this year. WHK will be busy submitting to IRD in the next few weeks to ensure this happens.

Further, given the restrictions in the new legislation, we would anticipate that a large number of existing QCs/LAQCs will not gain anything from transitioning to an LTC, especially given the removal of deductions for depreciation on buildings from 1 April 2011. For example, many LAQCs which owned property will probably cease to be loss making going forward.

A disappointing component of these proposed changes for many taxpayers where an LAQC structure no longer provides benefits, is that there is not a simplified and concessionary transition from LAQC to just being a standard company, without having to sign up for a complicated LTC regime. Surely, if one of the drivers for these changes was to eliminate LAQCs, this would have been worthwhile.

While the LTCs look and feel much like LAQC’s, it is important to note that there are some fundamental differences which taxpayers will need to understand prior to entering into the regime. Having said that, we are left wondering why we need a whole new regime when most of the same outcomes could have been achieved through a “tinkering” with the existing QC/LAQC regime.

Much like the Limited Partnership regime which was introduced in 2008, the LTC regime introduces a loss limitation. Notably, the LTC regime potentially taxes shareholders on their interest in the underlying assets (which may be taxable), rather than on the sale of the shares (usually on capital account).

The LTC regime, much like the existing QC/LAQC regime, limits shareholder number, but for the most the LTC regime would appear to have wider application. However, one narrowing of this applies to corporate shareholding. While in the existing QC/LAQC regime there is the ability to have a corporate shareholder (subject to it being a QC), there is no ability to have a corporate shareholder under the LTC regime. As such, existing QC/LAQCs owned by a QC/LAQC will not be able to transition to the LTC regime.

Finally, while the draft legislation seeks to encourage taxpayers to transition from QC/LAQC structures to other structures such as Limited Partnerships, the drafters have failed to grasp the commercial implications of such, including practical matters such as contractual obligations or security arrangements, which make such changes much more difficult than they envisage.

Andrew Sayers
As Principal, Andrew is head of the WHK Auckland Tax Team.

His specialised team look after and advice everyday businesses on tax and related issues. Andrew has a particular focus on international business structuring and cross-border transactions and is a member of WHK’s Import / Export Advisory Team, which provides specialist strategic advice to Kiwi companies looking to grow their business offshore and foreign firms operating in or entering the New Zealand market.
He is co-author of international publications including the CCH International Master Tax Guide, New Zealand Export and Trade Handbook and the Asia Pacific Tax Journal and has considerable expertise in all areas of taxation.

ABOUT WHK GROUP
WHK NZ is part of the WHK Group Limited, the fifth largest accounting and advisory firm in Australasia, with over 120 offices in Australia and New Zealand. WHK is also the largest provider of accounting and related services to small medium enterprises (SME) and high net worth clients. Affiliated with Crowe Horwath International, one of the largest professional services organisations in the world with offices in 88 countries.

ends

© Scoop Media