Budget Update on Property
June 2010
They intend replacing the existing Qualifying Company (“QC”) and Loss Attributing Qualifying Companies (“LAQC”) rules with flow-through entities for tax purposes. In general the ordinary partnership tax rules will apply to shareholders of qualifying companies under the new rules.
Existing QC’s and LAQC’s will be included within the definition of partnership and be removed from the definition of company. The entity will retain separate legal identity for legal purposes.
Both profits and losses will flow through to the shareholders or partners and be taxed at their marginal rates meaning no dividends will be paid and no imputation credit account (“ICA”) maintained.
If an existing QC ceased to meet the requirements to retain its status, or revokes it’s QC election it will revert to being taxed as a normal company – including maintaining an ICA.
Non-resident shareholders will be allocated their portion of the company’s income and expenditure and actual distributions will not be recognised for NRWT purposes. However, the underlying income may be subject to NRWT (i.e. dividends, interest, royalties etc).
It is proposed that assessable income, exempt income, excluded income, expenditure, capital gains and capital losses will be apportion by the QC to each shareholder in accordance with their effective interest in the company. This is to ensure that income or losses from particular sources cannot be streamed to the shareholder who would benefit the most (for example foreign sourced income).
Eligibility criteria will substantially remain the same but it is proposed to remove some restrictions including the allowable level of foreign non-dividend income in an income year and the restriction that the company cannot have income interests in a CFC or FIF of 10% or more.
If a shareholder disposed of their interest they are treated as disposing of their share of the underlying company property – with applicable tax consequences. However to reduce compliance costs they will only have to account for tax on disposing of their interest in a QC where the value of the proceeds from the disposal exceeds the total net tax book value of their share of company property exceeds $50,000.
If you elect out of the regime, the QC would revert to normal company taxation rules from the start of the current income year or a subsequent income year if you elect. If you fall out of the regime you revert to normal company taxation rules from the beginning of the current income year. Flow through treatment would arise on the deemed disposal and reacquisition of the company’s assets at market value on that date.
Tax losses will only be able to be offset to the extent of the shareholder’s investment in the QC. If unable to be utilised by the shareholder the losses can be carried forward by the shareholder until there is sufficient investment to allow the loss to be utilised. There is no ring-fencing in terms of income streams etc. The shareholders investment would include their share capital and the share of any debt personally guaranteed by the shareholder. Any investment made within 60 days of year end which is subsequently reduced within 60 days after year end will be disregarded for the purposes of calculating the shareholders investment basis.
Any existing losses in a QC (that is not an LAQC) will be allocated to shareholders based on their effective interest and only be allowed to be offset against the shareholder’s income from that QC.
Any credits in an ICA account will be extinguished upon transition to the new rules.
The flow through treatment will apply for income years beginning on or after 1 April 2011. There will be no deemed disposal and reacquisition upon transition to the new rules though you will need to determine your initial membership basis (investment).
Important: Items contained in this newsletter are general comments only and do not constitute advice. Changes in legislation may occur quickly and clients are recommended to seek our formal advice before acting in any of the areas.
