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By Bruce Bernacchi and Helen Corner

Wednesday 1st October 2003

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Owning rental property through an LAQC (loss attributing qualifying company) means you gain the advantages of the company structure, but are taxed as if you’d bought the property in your own name.

LAQCs have two key tax advantages:

  • Tax losses (arising from deductions for things like rates, insurance and depreciation) of an LAQC are offset against your other income, including wages and salaries, thus reducing your overall tax liability. By contrast, if you own property through a trust or ordinary company, the tax losses are retained by that entity and can’t be distributed to beneficiaries or shareholders.
  • The dividends you receive as a shareholder in an LAQC are either taxable but fully imputed (if the LAQC has imputation credits available), or are exempt from tax (if the dividend can’t be fully imputed), which means capital gains can be distributed tax-free. By contrast, dividends from an ordinary company’s capital gains are usually taxable in the hands of shareholders.

An LAQC is a creation of tax law. For all other purposes, an LAQC is just an ordinary company and has to meet normal requirements, such as filing annual returns with the Companies Office.

LAQCs have some disadvantages:

  • Investors don’t receive the protection from creditors that they would receive by using a trust
  • Shareholders are personally liable for tax payable by the company; shareholders of ordinary companies are not
  • An existing company that elects to become an LAQC must pay a “qualifying company election tax” equal to 33% of the revenue reserves of the company (although imputation credits available to the company may be offset against this tax), and must forfeit any tax losses
  • There are ongoing compliance costs associated with monitoring changes in shareholdings

Any other rules?
An LAQC must:

  • have only one class of shares
  • have five or fewer shareholders. Special counting rules mean that, for example, husband and wife are one shareholder
  • not be a foreign company or a unit trust
  • earn less than $10,000 of foreign non-dividend income per year.

The directors and a majority of the shareholders must notify the IRD that the company is to become both a “qualifying company” and an LAQC. Shareholders must agree to be personally liable for the income tax of the LAQC.

Is an LAQC a tax dodge?
Using an LAQC to invest in residential property that is rented to tenants is not tax avoidance or evasion. However, using an LAQC to own your family home, which it then rents back to you, risks being viewed by the IRD as tax avoidance. If the IRD successfully attacked this arrangement it’s likely that any tax benefits you had claimed through using the LAQC structure would be reversed. The IRD could also impose penalties and interest charges. In the right circumstances, LAQCs are appealing to those looking to maximise the commercial and tax advantages available to investors in residential rental properties.

Bruce Bernacchi and Helen Corner, Minter Ellison Rudd Watts

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