Look Through Company
Look through company (LTC) is a fairly new concept to our tax system which was introduced in Budget 2010. Basically the main purpose of introducing LTC is to strengthen our tax system by putting a cap on loss attribution rules.
Look through company rules were applicable from 01/04/2011 onwards and only apply to New Zealand resident companies.
1. Features of LTC:
- Only for income tax point of view LTC is treated differently otherwise for all other taxes such as PAYE, GST and FBT is treated as a normal company.
- LTC do not pay income tax and do not carry forward losses. LTC files its income tax return (IR7) showing income and expenses allocated to its shareholders proportionate to their shareholding. And shareholders file their tax return (IR3) showing they received income and expenses from LTC along with their other income and expenses.
- Maximum five shareholders (husband and wife are counted as one shareholder)
- All owners must agree for LTC election
- Only a natural person, trustee or another LTC may hold share in LTC
- Income & expenses, gains and losses and rebates and credits of LTC are passed to its owners in their shareholding percentage subject to loss limitation rules.
- Loss limitation rules ensure owners can only claim real economic loss. (see the example below)
- Upon transferring/selling shares in LTC, exiting owners will have to account for income derived from selling their share and pay any tax associated with that. However, there is a $50,000 threshold and different rules for trading stock in certain circumstances.
2. Loss limitation rules:
Section HB 11 and HB 12 of ITA 2007 covers this concept, this concept is most important as this is related to how much loss an owner can claim against their personal income. Which means an owner can only offset losses to the extent these reflects their economic losses.
Owner’s deductions are restricted to adjusted tax book value of their investment in LTC (“Owners Basis”) that means amount of deduction cannot exceed owner basis.
Owner Basis = (Investments- Distributions + Income – Deductions- Disallowed Amounts)
• Investments -funds introduced by owners, assets, loans or current account balances.
• Distribution - paid out to the owners, dividends, loans, current account debit balance. No salary or wages
• Income- Owners share of income including exempt income & capital gains
• Current + preceding years
• Deductions- Owners share of deductions & capital losses
• Only preceding years
• Disallowed amounts- This is to prevent artificially created investments, which means within 60 days after the balance date injected investments are disallowed threshold level is $10k, if under $10k ignore this rule