Tax consequences and look through companies (Pharmacy Guild – September 2012)

Look Through Companies (LTCs) is a new tax entity created in December 2010. The passing of this legislation also involved making changes to the rules for Qualifying Companies (QCs) and abolishing the old Loss Attributing Qualifying Companies (LAQCs).

LTC means that the company is “looked through” for income tax purposes. Owners of a LTC will be liable for income tax on the LTC ‘s profits, while also being able to offset the LTC ‘s losses against any other income in accordance to the owner’s effective interest.

It is important to consider the potential tax consequences if you are considering forming a LTC to own residential property. Expenses incurred relating to living in the family home is generally viewed as private expenditure, hence, not deductible for tax purposes.

If you rent your family home to yourself

If you, as an owner, live in a home owned by a LTC and claim deductions such as interest, insurance, rates, and repairs and maintenance for the property, the structure and the claiming of any resulting losses may be viewed as tax avoidance. The IRD may still consider the arrangement to be tax avoidance even if you pay market rent to the company to claim the expenses incurred relating to the property and allow any losses to be offset against your income.

The same principle applies if you use other structures, such as an ordinary company, partnership or trust. Tax avoidance carries penalties of up to 100% of the tax shortfall.

What if I live with my tenants in the property owned by the LTC (or company, partnership or trust)?

The situation about tax avoidance becomes less clear when an owner (shareholder) and other tenants live in a home owned by a LTC. The IRD considers that the proportion of expenses attributed to the owner will not be deductible for tax purposes but the remainder of the expenses may be.

Setting up a LTC for asset protection?

Despite it being seen as one of the main reasons for some people setting up a LTC , holding your private assets in a limited liability company may provide little or no asset protection. Shareholders must hold the shares in a LTC in their personal name in order to make use of the LTC losses. Shares in a LTC that owns residential properties represent an asset to the owner, equal to the market value of the properties, less the mortgage. As a result, it is possible for creditors to claim equal to the current value of the property.

Published in Contact Magazine September 2012.

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