WHAT IS AN LAQC?
WHAT IS AN LAQC?
What is an LAQC?
A loss attributing qualifying company (LAQC) is simply a normal company that has special tax status that has elected to be an LAQC.
LAQC’s are useful because if you are a property investor, the losses your rental property makes are attributed to the individual shareholders to offset against their personal income. This can result in a lower provisional tax liability or a refund of PAYE paid.
In many circumstances, capital profits of a business to be distributed tax exempt.
As a result, many New Zealand property investors and business owners use them for investing in property and operating businesses through, because they allow a host of tax advantages not afforded by an ordinary company.
With a normal company, if the company were to make a loss, losses can only be offset against future profits.
For example, if you make a loss of $20,000 then you will need to wait the company shows a profit of $20,000 before the $20,000 loss can be applied to be tax exempt.
For rental property investors, this may cause issues. If the property is fully ‘geared’ and making the full depreciation claims, it may be a very long time (even years) before the company is profitable and can therefore take advantage of the applicable tax losses that it has to carry forward.
With an LAQC the larger income earner can own all the shares and have all the losses claimed at the higher tax rate, which may amount to many thousands of dollars in tax refunds.
Furthermore, you can sell LAQC shares to a family trust without depreciation.
A Typical Example
Here’s an example:
Let’s take Mary (a rental property investor). Mary has a salary of $80,000 and pays normal tax through PAYE.
Mary also owns several investment properties in New Zealand and makes a loss of say $20,000.
With an LAQC, Mary should only have paid tax on $60,000 of her $80,000 salary. As a result, Mary is eligible for a tax refund for all of the tax she paid on her income between $60,000 and $80,000.
Currently, the tax rate applicable for individuals earning over $60,000 is 39%, Mary can expect a refund of $7,800.
If Mary had NOT elected to set up an LAQC and instead operate her properties through a regular company or a Family Trust that was NOT and LAQC, Mary would have to wait until the entity became profitable before receiving any tax relief.
IRD Criteria for becoming an LAQC
The Inland Revenue Department has certain criteria when it comes to setting up a LAQC. This list below is a summary only. For more information, please request a call or ask our experts a question.
- Must not be a foreign company;
- Must have fewer than 5 shareholders;
- All shareholders and directors must have elected that the company become an LAQC and not have revoked this status;
- The directors must have elected to become personally liable for their share of any income tax not paid by the company (this is quite a big difference between normal companies and LAQC’s);
- All shares in the company must carry the same rights
If you are unclear about how all this affects you, go ahead and request free information.
Taking the Next step
Setting up an LAQC is not complicated if you know what to do. The hard part is creating a solution that aligns with your goals, your life and your financial situation.
Issues that impact on LAQC formation include family trust options and asset protection including structuring of businesses. Plus there are pitfalls that need to be explained properly and managed.
At GRA we help both small to medium sized businesses and property investors get the most out of LAQC’s, minimising tax and ensuring asset protection is maximised.
How do we do this?
We take a holistic approach and provide expert one-stop-shop services that, to be honest, other Accounting firms only dream about.
Instead of selling or churning out LAQC’s, instead we focus on a goal of offering long-term and great value solutions that put money in your back pocket.
It’s as simple as requesting a free call to discuss your situation.
We think that’s the best way to do business. How about you?
What is an LAQC?
