The ink was barely dry on the legislative changes introducing the Look-through Company (LTC) regime back in 2010 before practitioners were voicing their concerns over the unwieldly nature of the rules and the fishhooks lying in wait for the unsuspecting taxpayer (and their advisor).
The LTC rules were introduced from 1 April 2011 essentially to provide a replacement option to the Qualifying Company (QC) and Loss Attributing Qualifying Company (LAQC) regimes. The QC regime still exists for those who chose to stay in the regime at 31 March 2011 however the ability to pass out losses to shareholders via an LAQC structure was closed off from 1 April 2011.
Transitional rules were introduced to easily enable QCs to become LTCs and while a number did transition, there still remain more QCs than LTCs demonstrating practitioners’ reluctance to advise their clients to become LTCs, primarily due to the complexity of the rules. That complexity mostly comes via the deduction limitation rule and the deemed disposal rule on a shareholding change.
The purpose of the LTC rules was to provide a workable structure for closely held companies and small business. But what in reality eventuated was a complex regime with the associated high compliance costs that goes with a complex regime. Not at all what a small business needs!
In early September 2015 Inland Revenue’s Policy and Strategy division issued the Official’s Paper: Closely held company taxation issues.
The issues paper suggests a range of changes to make the LTC rules more workable, which aligns with the Governments objective of simplifying tax requirements and reducing compliance costs for small and medium businesses.
Among those changes are the:
- eligibility criteria for a company to become an LTC
- use of LTCs by non-residents, and
- the requirement that LTCs only have one class of share.
The proposed key changes are as follows:
- Eligibility criteria
– a counted owner includes a beneficiary who us received a distribution (in the past six years)
– a trust shareholder cannot make a distribution to a non-LTC company
– a trustee remains a counted owner even if no distribution made (in the past six years)
– Charities and Maori Authorities cannot be LTC shareholders or beneficiaries of trust shareholders
– there can be more than one class of share (so long as all shares have the same rights to income and deductions)
– if more than 50 per cent of shareholders are non-resident foreign income is restricted to the greater of $10,000 or 20 per cent of gross income.
- Deduction limitation rule
– owner’s deductions are limited only when there is a partnership of LTCs
– carried forward deductions can be deducted in the 2018 income year
– the anti-avoidance provision in section GB 50 of the Income Tax Act is extended to LTC shareholders
- Existing QCs
– to avoid QCs being sold for a windfall gain, QCs will lose their QC status when there is a change of control in the company
- Remission income
– no remission income arises to LTC shareholders when an LTC’s loan is remitted due to the LTC not being able to repay the loan
- Entry tax
– the income adjustment done at the time a company enters the LTC regime will reflect the shareholder’s marginal tax rate not the company tax rate
There are also a raft of other changes proposed in the issues paper, including debt remission and dividend simplification rules for closely held company that are not LTCs or QCs.
Feedback on the proposed changes is being sought with the final date for submissions being 16 October 2015. It is not expected that the changes will apply until the 2017-18 income year.
For more information or assistance please contact Shelley-ann Brinkley or Phil Barlow.
Shelley-ann Brinkley Associate – Tax Consulting
T +64 9 414 5444
T +64 9 414 5444