LAQCs' popularity might lead to Treasury rethink

OPINION: The main attraction of Loss Attributing Qualifying Companies (LAQCs) is that losses flow through to shareholders, writes Murray McClennan in this week's Taxing Times.

Those shareholders offset the attributed losses against other income.

There are other advantages, including being a separate legal entity and the ability to distribute capital gains tax-free without having to wind up the firm.

It is clear that LAQCs are popular entities in which to own rental properties; indeed, they are virtually synonymous with rental properties.

The perception, whether right or wrong, is that LAQCs are used to buy rental properties with high borrowings. Losses occur as interest and depreciation expenses exceed rental income. As well as benefiting from attributed losses, shareholders seek to derive capital gains with the rental properties increasing in value. The current availability of LAQC losses concerns IRD as it reduces overall tax revenue.

One way of restricting losses would be to ringfence rental losses to a maximum annual amount. Many years ago the then government was concerned that "Queen Street farmers" were investing in farming activities to obtain losses and reduce personal tax liabilities. A limit of $10,000 on passive farming losses was imposed. That is, unless farming was the taxpayer's main occupation, losses in excess of $10,000 had to be carried forward for future use.

Such an approach may seem simple, but astute taxpayers organise their affairs to skirt around the rules. Treasury and IRD may remove the ability to elect LAQC status.

This would allow existing LAQCs to remain, provided the various requirements for LAQC status are retained. It is likely that the Tax Working Party will look at the future role of LAQCs in our tax system.

» Queenstown-based Murray McClennan is a tax director at WHK Cook Adam Ward Wilson.

- © Fairfax NZ News

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