Important information about LAQC changes - the legislation is now final
On 20 December 2010, legislation was enacted to effectively remove the attribution of losses for all LAQCs (Loss Attributing Qualifying Companies), with effect from 1 April 2011. (The exception being for early balance dates, for which the effects are delayed until the 2012/2013 year.)
The Government's overriding strategy behind the introduction of flow-through treatment of profit and losses is to prevent what they refer to as 'arbitrage' - the retention of profits in a company, therefore utilising a lower company tax rate (28% as of 1 April this year).
Summary of Changes and Implications
The following is a brief summary of the most significant changes and implications:
1. As of 1 April 2011, LAQCs will not be able to attribute losses to shareholders.
2. A new tax entity, called a Look Through Company (LTC) is now created. Profits and losses (but with some limitations) are passed on to its shareholders. This means that losses and profits will be deducted or taxed at the shareholders' marginal tax rate.
3. Losses in LTCs will only flow through to its shareholders to the extent of the shareholder's investment in the company (including the share of any debt guaranteed by that shareholder).
4. The shareholders of an LTC will be treated as holding the assets of that LTC directly. If they sell their shares in an LTC they will therefore be treated as disposing of their interest in the underlying company property (subject to some exceptions) and will therefore be up for any associated tax consequences. Examples are depreciation recovered and gains on the sale of trading stock.
5. If the company exits the LTC regime (which could happen unintentionally) a disposal of the company assets will be deemed to have happened and this will possibly give rise to negative tax consequences.
6. LTCs will not pay income tax as all income will be attributed to shareholders and those shareholders will be responsible for their own tax.
7. LTCs can only have one class of shares.
8. Having said all that, the above is merely a tax fiction. An LTC retains its identity as a registered company with limited liability and therefore is still governed by the Companies Act 1993.
Very broadly, clients will have several options. These are:
1. Become an LTC (Look Through Company).
2. Remain as a QC (Qualifying Company), but without the ability to attribute losses to shareholders.
3. Exit the QC regime and effectively become a standard company.
4. Restructure the ownership of the business/assets so they are owned by a Partnership, a Limited Partnership or a Sole Trader.
With all of the above in mind, keep an eye out for our LAQC review letter and in the meantime don't hesitate to contact us with any questions or ideas. Our overriding aim here is to give you the best possible tax advice, not just for the now, but for the future.