Qualifying Company Reforms

Posted: 9th December 2010

The Government has now released the much awaited draft legislation on the changes to the Qualifying Company (QC) and Loss Attributing Qualifying Company (LAQC) regimes.

 The draft legislation is somewhat different to the initial discussion document released.  The proposals outlines a new "look through company" (LTC) to replace the old LAQC.  This is an entity which is essentially treated as a partnership for tax purposes but remains a company for commercial purposes. 

The LTC is like the LAQC in many ways but includes some important changes, such as attribution of income as well as losses, and losses being subject to loss limitation rules.

The LTC regime is set to commence from the first income year beginning on or after 1 April 2011 (the March 2012 year for March balance dates). For existing QCs and LAQCs, the temptation is to simply convert to an LTC.  Under the new rules however, there is a transitional period which allows LAQCs and QCs six months after the start of their 2012 income year to decide the best structure to use (this will take effect for the full 2012 year).

In general, transition into an alternative structure during the transitional period will not give rise to any income tax consequences.

Points to note are:

• The loss limitation rules - whilst the idea is simple enough, the mechanics of these provisions in the draft legislation are not straight forward and it is not necessarily a foregone conclusion that shareholders will receive the same entitlement to losses as they did in an LAQC.
•  
  Existing QCs and LAQCs will not automatically become LTCs.  Instead they will have to elect into the regime and if they do so within 6 months from the start of the 2012 income year, they will elect under the transitional provisions.  The transitional rules preclude having to pay tax on the existing reserves of the company on election.
•  
  Existing QCs/LAQCs will be able to elect to be an LTC, a limited partnership, a partnership or a sole trader without any further tax cost, if it is done so within 6 months from the start of the 2012 income year.  This gives us a few months to consider which entity they will be best to proceed with.
•  
  If you decide to wait to restructure, there will be additional tax costs associated with the disposal of assets and on existing reserves if electing to become an LTC other than under the transitional provisions.
• 
  If existing QCs and LAQCs do nothing, they are able to stay in the QC regime but there is no ability to attribute losses to shareholders.  The Government has advised that a review of the current dividend rules for QCs will be undertaken.

How this affects you?

We have identified all our clients who currently have LAQC's and will be making contact early in the New Year with further detail, and also to plan the way forward as this will be different in each case. 

 If, in the meantime, you have any questions or would like further information, please call Martyn Henderson on 09 308 4050 or email at martyn.henderson@tbag.co.nz