Interest Deductibility in LTCs

Posted: 16th May 2011

The IRD has confirmed that interest expenditure will remain deductible when a Qualifying Company (QC) transitions to an Look Through Company (LTC) in the common scenario where:

• an individual has sold their private home into a Loss Attributing Qualifying Company (LAQC) as a rental asset,
• the LAQC has borrowed money to purchase the property from the individual (the LAQC shareholder),
• the LAQC shareholder has used the proceeds from the sale to acquire a new home.

Given that a shareholder in an LTC is treated as holding a proportionate share of the LTC property (similar to a partnership), there was some concern that the interest expenditure will no longer be deductible upon transition to an LTC.

The issue was that the borrowing to acquire the property was not ultimately used for the purpose of deriving income, but to enable the shareholder to purchase a private asset (or other non-taxable use).

The IRD has stated that the interest would remain deductible as the rental property remains an income producing asset, whether owned by the LAQC or the LTC.  The IRD further states that the use to which the individual, as the original seller of the asset, puts the sales proceeds they receive is not relevant to the issue of interest deductibility on the borrowing to acquire the rental property.

Please contact Martyn Henderson at martyn.henderson@tbag.co.nz if you would like to discuss this article or other LTC issues further.