Elevate CA Blog

We’ll be completing our review of all QC and LAQC clients over the next few weeks.  From the start of the next financial year, LAQCs will no longer be able to attribute their losses to shareholders.

The Government’s strategy behind these changes is to prevent ‘arbitrage’ – the ability for an LAQC to pass losses out to shareholders where they can be used at the shareholder’s marginal tax rate of up to 33% – while retaining any profits in the company where from 1 April they will be taxed at only 28%.

So the new legislation arising from last year’s budget announcement introduces the “Look Through Company” (LTC), which will allow allocation of the company’s losses to shareholders in proportion to their shareholding in a similar fashion as existing LAQCs.  But it also requires that profits are taxed in the hands of shareholders resulting in more equal treatment of losses and profits.

The new LTC is an option for people who currently hold loss making businesses or investments in LAQCs.  Shareholders are able to elect for their existing LAQC or newly incorporated company to become an LTC between 1 April and 30 September 2011.

Here is a brief summary of the most significant changes and implications:

• As of 1 April 2011, LAQCs will not be able to attribute losses to shareholders.
• A new tax entity, called a Look Through Company (LTC) is now created.  Profits and losses (but with some limitations) are passed on to its shareholders.  This means that losses and profits will be deducted or taxed at the shareholders’ marginal tax rate.
• Losses in LTCs will only flow through to its shareholders to the extent of the shareholder’s investment in the company (including the share of any debt guaranteed by that shareholder).
• The shareholders of an LTC will be treated as holding the assets of that LTC directly.  If they sell their shares in an LTC they will therefore be treated as disposing of their interest in the underlying company property (subject to some exceptions) and will therefore be up for any associated tax consequences.  Examples are depreciation recovered and gains on the sale of trading stock.
• If the company exits the LTC regime (which could happen unintentionally) a disposal of the company assets will be deemed to have happened and this will possibly give rise to negative tax consequences.
• LTCs will not pay income tax as all income will be attributed to shareholders and those shareholders will be responsible for their own tax.
• LTCs can only have one class of shares.

But having said all that, the above is merely a tax fiction.  An LTC retains its identity as a registered company with limited liability and therefore is still governed by the Companies Act 1993.

The options for those currently operating QCs and LAQCs include the following:

• The default option – which in most cases is unlikely to be the best option – will be to continue as a QC without the ability to attribute losses to shareholders.
• Revoking LAQC status and being taxed as an ordinary company.
• Electing to become an LTC as detailed above.
• Becoming a partnership or a sole trader. Special rules will allow this transition without a tax cost – although if property is involved there will be significant conveyancing, legal and bank costs.

Some of the issues we’re considering during these reviews are these:  If the company owns assets of any sort, how long do you intend to own them?  Do you intend to introduce other shareholders in the future – or to transfer shares into your trust at any point?  Does the company’s activity generate losses?  How long might these losses continue – particularly given the changes to depreciation rules?  What is your actual economic investment in the LAQC and how might this change in the future?

Depending on our recommendations after reviewing your QC or LAQC, we may make use of the transitional rules and tax concessions which will enable us to transition QCs and LAQCs across to an LTC, a partnership, a limited partnership or a sole trader.    We will need to file election documentation with IRD for all LAQCs that are to become LTCs, as well as give written notice to IRD for any LAQCs that choose to transition to another entity type.

For those LAQCs where the recommendation is to transition to another entity type rather than become an LTC, there will be administrative tasks and potentially restructuring and legal costs and issues such as:

• Ensuring that current finance terms are not adversely affected
• Transferring commercial contracts and banking arrangements to the new entity
• The legal transfer of businesses/assets to the new entity with its associated legal costs
• The transfer of employment agreements across to the new entity
• Potentially a raft of Inland Revenue registrations and deregistrations
• Transfer of all insurance covers
• Informing suppliers of the new entity so that you hold valid tax invoices
• Deciding whether the LAQC should be liquidated, or registered as a non-active company, or left as a shell company

Unfortunately this is not as simple as just transferring all of our QC and LAQC clients across to the LTC regime as this would create real tax disadvantages for some.  And nor is doing nothing likely to be the best option for all clients.  If you have any queries or concerns, do contact us.

 

Elevate CA are growing, and we’re looking for just the right accountant to join our team.     

 

Who are Elevate CA? 

We are new, we are different and we are growing fast.   We are small enough to be nimble – and we are willing to take a risk to try innovative ways to deliver better value and service to our clients.   We are a relaxed team – but highly focussed on providing fantastic value and service to our clients.  And we’re a very long way from the traditional accounting “factory”.   

We embrace innovation and change as a positive rather than avoiding it as a threat to “the way things are done around here”.  We have up-to-the-minute IT, we are marketing focussed, and are always looking for opportunities to connect our business clients with each other.

We are members of the NZ Institute of Chartered Accountants – and if you’re completing PCEI or PCEII, we have a registered mentor on the team.  

 

Who we’re looking for? 

We need a person who is up to speed in the industry right now.  You’ll need to have been employed as an accountant in an NZ Chartered Accounting business for at least the past three years.  And equally important is the attitude to thrive in the unique way we operate.

If you can tick those boxes – and if you like what you see on this website, please read on.  This could be a great opportunity for you.

A partial accounting qualification – and knowledge of the “Accountants Office” software would be a real advantage.  But  we know that we can’t have everything, so if your CV is missing either of those, it won’t necessarily be a deal killer. 

 

The position 

This is a full time position based in our CBD Whangarei office, with plenty of client contact.  Here’s what you’ll be doing: 

1. preparation of financial statements and tax returns from source documents;

2. playing a key role in managing our relationship with clients, other professionals and the IRD. 

 

While the focus of this position will always be producing outstanding results for our clients, we pull together as a team to do what is required – so this will not be a role defined strictly by the letter of a job description.    

 

Taking it further 

If you’re the person we have described here, we’d very much like to hear from you.   Here’s how to grab hold of this opportunity:

 

1.  If you have been employed as an accountant in an NZ Chartered Accounting business for at least the past three years – and you like what you see on this website, proceed straight to step two without delay!

2.  Email your CV to goingUP@elevateCA.co.nz before 15 April.  We want to know about your CA experience, where you’re working right now, the kind of work you’re doing – and any questions you may have.  You can count on our complete confidentiality. 

3.  We will move quickly.  You’ll hear from us straight away to acknowledge receipt of your CV – and to arrange interviews where applicable.   

4.  Start date will be to suit – and you’ll be very busy from day one! 

 

Thank you for taking an interest in joining the Elevate CA team!

 

 

If you’re a commercial or residential property investor the stakes are about to get higher in the distinction between repairs and maintenance and capital expenditure.  Repairs and maintenance costs are typically tax deductible.  But from the start of the next tax year, no tax deduction will be possible for depreciating most capital expenditure on most buildings.

The line separating these two types of expenditure can be fine – and the costs of getting it wrong can be high no matter which way you err.  If building repairs and maintenance costs are wrongly treated as capital expenditure, these costs may fall into a black hole with no chance of a tax deduction.  And if during a routine risk assessment the IRD finds capital expenses wrongly claimed as repairs and maintenance, penalties, use of money interest and a full audit may follow.

On one end of the continuum, expenditure that restores the building to the condition when you purchased it is likely to be tax deductible repairs and maintenance.  At the other extreme, work that improves the building is likely to be capital in nature.  And from the next tax year, these capital costs will typically be unable to be depreciated.

Black and white on the face of it, right?

But between these extremes, this can get rather grey.  Property investors often solve maintenance problems during capital expenditure.  Or they may use improved materials for an enhanced result during routine repairs and maintenance.

 

How do you treat the cost of replacing the somewhat tired original roof on your 1960’s era building that has sprung a serious leak in a storm?

 

Is fitting a new kitchen capital expenditure or repairs and maintenance?  How about when the old chipboard cabinets have become so soft and musty that the kitchen is generally unhygienic after years of leaking taps and hard use by tenants?

 

What if you take the opportunity to replace rattling timber joinery with modern aluminium windows after complaints from your tenants about the draughts? 

 

How do you stand with replacing a stained old toilet bowl and a cistern that no longer flushes reliably with a crisp new water saving unit? 

 

Or replacing a timber floor that is showing signs of rot around a wet area with a new, waterproof tiled floor?

 

There is often no black and white answer.  The correct treatment often comes down to the particular facts and circumstances surrounding the expenditure.  Every situation will have its subtle differences that may affect the reasonableness of one position versus the other.

Check with us before assuming your building expenditure will or will not pass scrutiny as tax deductible repairs and maintenance.  A little bit of careful attention will go a long way towards clarifying the situation and maximizing your tax deductions without falling foul of the IRD.

 

 

We now know that LAQCs will no longer be able to attribute their losses to shareholders from 1 April 2011. 

Now that the draft legislation has been released, we have a much clearer view of how the new rules announced in the budget will look.  On the face of it, this seems a rather radical departure from the changes proposed in the budget, which included no such axing of the ability of shareholders to access an LAQC’s losses.

However the draft legislation also introduces the “Look Through Company” (LTC), which will allow allocation of the company’s losses to shareholders in proportion to their shareholding.

The new LTC seems likely to be the new preferred option for people who currently hold loss making businesses or investments in LAQCs.  Shareholders will be able to elect for their existing LAQC or newly incorporated company to become an LTC from 1 April 2011.

So what makes an LTC different to existing LAQCs?  There are many subtleties, but the top three changes that will affect most existing LAQCs are these:

 

Unlike existing LAQCs rules, shareholders of LTCs will be personally taxed on the company’s profit at their own marginal tax rate. This seems reasonable as it aligns the treatment of the company’s profits with the treatment of its losses.

Unlike existing LAQCs, any transfer of shares in an LTC will be treated as a sale of the underlying assets. This may trigger significant depreciation recovery issues creating a tax bill without the funds to pay the tax from an actual sale of the asset. Careful management will be needed here.

Shareholders will only be able to access LTC tax losses to the extent the losses reflect their own economic loss from the company’s activities. “Economic loss” will include share capital, shareholder loans and company debt guaranteed by the shareholder, so this is not as narrow a test as many people feared following the budget.

 

All those currently operating LAQCs will need to consider their options with their tax advisors. Options will include:

The default option which is unlikely to be the best option will be to continue as a QC without the ability to attribute losses to shareholders.

Revoking LAQC status and being taxed as an ordinary company.

Electing to become an LTC as detailed above.

Becoming a partnership or a sole trader. Special rules will allow this transition without a tax cost – although if property is involved there will be significant conveyancing, legal and bank costs.

 

If you hold property investments in an LAQC, I suggest you review this with your tax advisor.

Some of the issues that will need to be considered are:  How long do you intend to own the property?  Do you intend to introduce other shareholders in the future – or to transfer shares into your trust at any point?  Does the property generate losses?  How long might these losses continue given the changes to depreciation rules?  What is your actual economic investment in the LAQC and how might this change in the future?

Although the introduction of the LTC is a complicating factor since the original budget announcements back in May, the new LTC structure does broadly reflect the changes announced in the budget.