As many of you will be aware the Budget this year announced changes to the Qualifying Company & LAQC regime which will take effect from 1st April 2011. To date only an Issues Paper has been released by the IRD, and it will be some time yet before the final regulations are in place.
The intention is to take the limited liability partnerships regime and overlay that on top of the qualifying company legislation. Basically the regime will pass through any profits or losses onto the underlying shareholders tax returns, and income is taxed at their marginal tax rates.
The regime then limits the ability to offset any losses to the amount of money the shareholder has “at risk” in the company. This can be in the way of shareholder advances or even personal guarantees of company debt. For example, often a shareholder of a LAQC rental property is required to personally guarantee the mortgage borrowings to their bank to support the actual mortgage held directly. As each shareholder is usually jointly & severally liable under the guarantee this can be counted by each shareholder as money at risk, and would qualify the person to claim their share of losses up to the level of the debt guaranteed. It is therefore likely that many of our clients with rental properties in this structure will see little change to their effective tax deductions. Remember though that there will be no depreciation claim on buildings from that year, giving smaller tax losses anyway.
Other issues which will arise when QCs are taxed as partnerships are:
· losses and profits of the company will be taxed directly to the shareholders in proportion to their shareholding at the shareholder’s marginal tax rates
· a sale of shares will be deemed to be a sale of a portion of the company assets, meaning depreciation recovery issues
· imputation credits will disappear on transition to the new regime, so future distributions from QCs will not be subject to tax
· election out of the QC regime will be a deemed sale of all the assets, again with depreciation recovery issues
However, there are bound to be other unintended consequences of the new rules. For this reason, we are not jumping the gun, but will wait for the legislation to be released, and we expect to be contacting all of our clients with qualifying companies and LAQC’s over the summer months to discuss individual solutions for each client. Some companies may find that an election out of the regime is the best option, others that no change is necessary, and some may need a full entity restructure.
The point of this article is just to advise that we will not be forgetting you, and will contact you before the end of the financial year in relation to your QC entity.
In the meantime if you have any questions, please don’t hesitate to contact your Partner or Client Manager.
