Legislation is to be introduced soon that will require LAQC’s to be taxed as if they are limited partnerships.
The reduction in the company tax rate was surprising, given that New Zealand invariably follows Australia’s lead and not the other way around. It is not unusual for business owners to have their companies owned by family trusts. Considering the 5% difference between the 28% corporate tax rate and the 33% trust tax rate, directors may opt to retain and reinvest profits within company structures rather than distribute profits as dividends that will be taxed at 33% in the shareholder’s hands.
The reduction in the personal tax rate of 5% for those taxpayers earning in excess of $70,000 is significant. It should also be noted that many taxpayers with investment properties are currently in the top personal tax bracket. Although there will possibly be extra tax payable as a result of the removal of depreciation allowances on buildings, this should be compensated for by the tax cut referred to above.
There is no doubt that treating LAQC’s as «flow through» entities, taxed under a similar regime to limited partnerships, will have a significant impact on all LAQC’s whether they are used for property investment or not. Under the current system, losses from an LAQC flow directly back to the shareholders who take advantage of the losses at their personal tax rates (soon to be a maximum of 33%). However when an LAQC produces profits those profits can be retained in the company and taxed at only 28%. It is this perceived notion of potential tax avoidance that has given rise to the limited partnership proposal as this «flow through» entity requires both profits and losses to flow out, meaning that profits from LAQC’s will effectively be taxed in the shareholders’ own hands at their own personal tax rates.
Due to space constraints, I have only briefly touched on some of the more significant tax changes proposed. I recommend that if you have an LAQC, you should consult with your professional advisor sooner rather than later in order to put appropriate strategies in place having regard to the matters discussed above.
Please feel free to contact Auckland lawyer, Ian Mellett (BComm LLB H Dip Tax) at Auckland law firm Quay Law for more information, or if you have any questions regarding your asset protection, planning, family trusts, taxation or other legal needs.
(As published in The South African — August/September 2010) Download the PDF