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Changes to LAQCs and QCs
The Government signalled reforms to the Loss Attributing Qualifying Company (LAQC) and Qualifying Company (QC) rules in the Budget 2010.The proposal was that the current QC rules would be replaced by a new set of rules to make both QCs and LAQCs flow-through entities for income tax purposes, similar to the treatment of limited partnerships.
Under the proposal, a company's income and losses from both QCs and LAQCs would be passed through to shareholders, meaning that the shareholders will pay tax on the company's profit, and use losses, at their marginal tax rate. This is different from the existing LAQC rules because shareholders are being taxed on the income as well. This reduces arbitrage opportunities between the company tax rate and top personal tax rates.
The new rules create a new tax entity, called a look-through company (LTC). Shareholders of a closely-held company can elect to become an LTC. An LTC's income, expenses, tax credits, rebates, gains and losses are passed onto its shareholders, in accordance with their shareholdings in the company.
The LTC retains its identity as a registered company and will keep its corporate obligations and benefits under general company law, such as limited liability.
Look-through treatment applies for income tax purposes only. The shareholders of an LTC are regarding as holding the LTC's assets directly and carrying on the activities of the LTC personally. Thus, in general, a sale of shares in an LTC is treated as a sale of the underlying assets.
The LTC rules also include a loss minimisation rule, which is similar to that of limited partnerships. This means owners can offset tax losses only to the extent the losses reflect their economic loss. Any losses a shareholder cannot use are carried forward and may be used by the shareholder in later years.
If you already have an LAQC, you have several options to choose from next year. You can, without tax cost:| 1. | Continue as a qualifying company (QC) without the ability to attribute losses (which will instead be used at the company level)
- This is the 'default' option for all existing QCs and LAQCs
- You will no longer be able to attribute losses to your shareholders
- This applies until the Government has completed its review of the dividend rules for closely-held companies.
| | 2. | Be taxed as an ordinary company.
- You will need to revoke your LAQC election
- Any new losses will have to be used by the company, not the shareholders
- All dividends will be taxable to your shareholders, although imputation credits may be attached.
| | 3. | Be taxed as a look-through company
| | 4. | Become a limited partnership, an ordinary partnership, or a sole trader
- Special rules will enable you to transition into a limited partnership, partnership or sole trader, with no tax cost
- You will need to restructure your business and either make the company non-active or wind it up. The transition rules provide extended time for this restructuring
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While LAQC's will be treated as full flow-through entities from 1 April 2011, the Government has announced that there will be an option to transfer at no tax cost to another entity type.
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