Wineries and LAQC Tax Losses (Winter 2011)

Many vineyards have incurred losses in recent years and the LAQC (Loss Attributing Qualifying Company) structure has proved useful where shareholders have had other sources of income with tax paid at source.

In May 2010, the Government announced the introduction of flow through treatment of profits and losses for closely held companies. Government is keen to implement measures that prevent what is sometimes referred to as ‘Arbitrage’, i.e. the retaining of profits in a company and therefore the utilisation of a company tax rate (28 percent as of 1 April next year) that is lower than the top personal rate (33 percent as of the same date).

Their proposals attracted a number of submissions from business and professional groups, including the NZ Institute of Chartered Accountants. Those submissions have had some impact on the original proposals. Inland Revenue’s policy division has now prepared draft legislation to implement the far-reaching changes to the Qualifying Company regime. Although the legislation is still in a draft form, it is likely to become final within weeks.

A general overview of the changes and implications

  • As of 1 April 2011, LAQCs will not be allowed to attribute losses to shareholders.
  • The legislation creates a new entity, called a ‘Look Through Company’ (LTC).
  • Companies will be allowed to transition across to become an LTC, or alternatively they can change to another business structure (for example a partnership), without any tax cost.
  • A LTC’s profits and losses will be passed on to its owners, according to each shareholder’s effective interest in the company. This means that losses and profits will be deducted or taxed at the owner’s marginal tax rate.
  • Losses in LTCs will only flow through to owners to the extent that those losses reflect their economic loss.
  • Owners must elect to become an LTC. In other words,your accountant will need to complete precise IRD forms to ensure an LTC election is valid.
  • The shareholders of an LTC will be treated as holding the assets of that LTC directly. This raises complex issues where those assets are sold.
  • An LTC retains its identity as a registered company and therefore is still governed by The Companies Act.
  • We must at this point stress the very general nature of the above overview. The legislation is quite complicated so check with your accountant.

For those clients with LAQCs, what are the options?

  • Stay as a Qualifying Company (QC). This means you will not be able to allocate any company losses to shareholders. Losses will need to be used by the company, against other income. If your company makes regular losses, and you want to use those losses against personal income (such as profits from another business, or wages from employment), this option may not work best for you.
    Be taxed as an ordinary company. Once again, you will not be able to allocate company losses to shareholders. Also, you will miss out on certain other benefits that QCs enjoy, such as the ability to distribute capital gains without winding up the company.
  • Be taxed as a Look Through Company (LTC), as summarised above.
  • Restructure to another type of entity, such as a partnership, a limited partnership, or a sole trader. As you can imagine, such a restructure is not necessarily a simple matter.

Whilst the current challenging trading times continue, the LTC structure may be successfully employed by some within the winery sector.

Published in WINE Hawke’s Bay Autumn 2011.

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