OPINION: Today's Monday Business contributor is Gaylene Findlay, an associate with BDO New Plymouth, part of a BDO New Zealand network of independent chartered accounting and business advisory firms.
Post Budget 2010, there has been plenty of discussion regarding changes in tax rates, loss of building depreciation claims and the increase in the GST rate. What seem to have slipped under the radar are the changes to Qualifying Companies (QCs) and Loss Attributing Qualifying Companies (LAQCs).
The Government has proposed a substantial overhaul to the QC/ LAQC rules to stop what it believes are a number of tax advantages of LAQCs, which will apply to most LAQCs from next April 1. These types of entities are now very common throughout New Zealand, being used for property investment, farming, manufacturing and retail.
In simple terms, the changes combine the LAQC and QC regime into one (QC) and treat these companies the same as partnerships while retaining the benefits of limited liability. However, the changes do go deeper.
z Losses will be limited to the amount that the shareholder has at risk in the QC, meaning a possible restructure of shareholder advances to share capital may be required. Alternatively, a personal guarantee for the bank debt may satisfy the law changes. Losses unable to be offset immediately will carry forward and offset against future taxable income.
z QC income will flow through to shareholders in the way same as losses flow through, meaning that income will be taxed at the shareholders' personal tax rate (soon to be 33 per cent) compared with the company tax rate (to be 28 per cent).
z Transferring shares to existing or new shareholders will potentially trigger a depreciation recovery as the shareholder is deemed to sell their share of the QC assets. This will also occur if a QC ceases to be a QC. There will be special disposal concessions but these may not apply to the majority of the QCs that operate.
Our conclusion therefore is that QC shareholders will need to carefully consider their options leading up to the proposed start date of the new rules.
If a QC is loss-making then the shareholder's at-risk money should be reviewed to ensure all losses can be used by the QC shareholder. If a QC is profitable then, before the new rules apply the shareholder may choose to opt out of the QC rules and become a normal company for tax purposes - resulting in profits being taxed at the new 28 per cent company tax rate.
If the QC shareholder is contemplating transferring their shares to a trust or other shareholder, it may be beneficial to opt out of the new QC rules before they apply, as a sale of shares in a QC under the proposed new rules would result in a sale of the underlying QC assets and possibly depreciation recovery income.
Time will tell whether our love affair with QCs will change following the proposed changes. Significantly, the Government is proposing to remove the many features of the QC regime that has made them so popular with business owners, particularly property investors.
QCs may have their place, but more care will be needed in their use because they won't be the off- the-shelf solution that they have so frequently become. So don't wait - starting planning for the proposed changes now.
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