What are QC’s, LTC’s & LAQC’s – and how do you get one?
Whangarei Accountants explains what Qualifying Companies, Look Through Companies and Loss Attributing Qualifying Companies are, and the advantages or disadvantages of each.
In previous articles we have focused on the various structure options open to the property investors and small business owners.
Clearly, the best business structure for asset protection, tax minimisation, name-protection and overall credibility is the limited liability company (often referred to as an “incorporated company”).
Here we discuss the Qualifying Company (QC), Look Through Company (LTC) and Loss Attributing Qualifying Company (LAQC) options for the small business owner.
What are QCs LTC’s and LAQCs and what are their advantages?
A Qualifying Company is a limited liability company that has elected to pay tax (if any) on its capital gains and net profits at the company tax rate before paying tax-free dividends to it’s shareholders.
A Loss Attributing Qualifying Company is a Qualifying Company that has elected to pass its operating losses on to its shareholders so that they can offset the losses against their own income in order to pay less personal tax overall. It was very common for companies which owned rental properties to elect to be LAQC’s, because rental properties often operate at a loss. LAQC’s are no longer an options and have been replaced by LTC’s.
And how does a business become a QC or LTC?
Any New Zealand owned company with five or fewer shareholders can elect to be a QC or LTC. Married couples are classed as one shareholder, as are a parent and child etc, so most small-to-medium New Zealand businesses have no trouble meeting the criteria.
It costs nothing to elect to become a QC or LTC. The shareholders and directors of a company simply complete an IRD form (IR436) and once their QC or LTC election is confirmed by the Inland Revenue Department, they can begin taking advantage of their new company status from their next financial year.
So, what are the disadvantages?
The disadvantages of electing to be a QC or LTC are surprisingly few. The shareholders must agree to be personally liable for any income tax which is not paid by the company. Any tax that the company owes must be paid and up-to-date prior to the QC or LTC status commencing and any company losses must be passed on to shareholders and not carried forward into subsequent years.
For the majority of small New Zealand businesses, the advantages significantly outweigh the disadvantages.
Who should elect to become a QC or LTC?
The QC and LTC options should be considered by the owners of any small to medium sized business who want to pay themselves tax-free dividends from their company and/or offset company losses against their own personal income for tax purposes.
Undertaking a little research on the subject of QCs and LTC’s usually proves very worthwhile for most small business or investment property owners.