Look-through companies (LTCs)

Legislation passed in December 2010 creates a new tax entity known as the look-through company (LTC).

The LTC rules become available for income years starting on or after 1 April 2011.

Key features of LTCs

Unlike the LAQC rules, shareholders of an LTC are liable for tax upon the company's profit, as well as being able to offset the company's losses against their other income. The key features of an LTC are:

• The LTC retains its identity as an incorporated company, and will keep its corporate obligations and benefits under general company law, such as limited liability.
• For income tax purposes, the LTC is "looked-through" and the owners of an LTC are regarded as holding the LTC's assets directly and carrying on the activities of the LTC personally.
• An LTC's income, expenses, tax credits, gains and losses are passed onto its owners, in accordance to their effective interest in the company.
• Each owner of the LTC will then record any income or losses, as appropriate, in their own income tax return.
• For other tax purposes (such as GST, PAYE or FBT) the LTC retains its tax obligations.

Who can become an LTC?

To become an LTC a company must meet the following criteria:

• It must be a New Zealand tax resident company. The residence of the company, not its shareholders, determines a company's residence.
• All the company's shares can only be owned by individuals, trustees or another LTC. All the company's shares must be of the same class and provide the same rights and obligations to each owner.
• The LTC must have five or fewer "look-through counted owners" who ultimately will receive any income or loss from the LTC. Related owners within two degrees of relationship can be counted as a single look-through counted owner. There are special rules for determining who counts as a look-through counted owner when shares are held by a trustee. This is explained in more detail in the Look-through companies (IR879) guide - go to "Forms and guides".

Electing to become an LTC

The shareholders of a company can elect for the company to be an LTC by completing a Look-through company election form (IR862) - go to "Forms and guides"

• All the LTC's shareholders must sign the election form.
• A guardian or legal representative must sign for owners aged under 18, or who are not legally able to sign the election.
• A company director, or an agent authorised by a director, needs to complete the director's notice on the IR862. This confirms that all owners have signed the election and that the company meets the eligibility to be an LTC.

Companies that are QCs or LAQCs in the income year prior to the income year starting on or after 1 April 2011 can elect for the company to be an LTC at no tax cost using these special transitional rules:

• The transition can take place in either one of the first two income years starting on or after 1 April 2011. The year chosen is called the "transitional year."
• If the QC or LAQC chooses to transition during the second of the two possible transitional years, they must have remained a QC for the first transitional year.
• A Look-through company election form (IR862) must be completed and sent to us. If the election is made within six months of the start of the transitional year, then the company will be treated as being an LTC from the start of that transitional year.

You can find more information about existing QCs and LAQCs transitioning to an LTC in our Look-through companies (IR879) guide - go to "Forms and guides"

The LTC's income and losses

The income of an LTC is taxed, and expenses are deducted, as if each owner has received that income and incurred the expenses personally in proportion to their effective interest in the LTC.

Any profit is taxed at the owner's marginal tax rate, while the owner can offset any losses against their other income, subject to a loss limitation rule.

The loss limitation rule is similar to that for limited partnerships. Owners can offset tax losses only to the extent the losses reflect their economic loss. Any loss that cannot be used is carried forward and may be claimed in future years, subject to the application of the loss limitation rule in those years.

The LTC will file an updated IR7 return showing the attribution of income and losses to the LTC's owners and each owner will then record their income or loss from the LTC in their own return.

Find out more

• Find out more about the QC and LAQC rule changes
• Tax Information Bulletin Vol 23, No 1 (February 2011) explains the LTC rules and the other changes to the QC and LAQC rules in further detail

 

 

Date published: 08 Jun 2011

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