What is a Look Through Company or LTC? That's a good question.
Basically, it's the replacement for the old LAQC (Loss Attributing Qualifying Company). At tax time, you look through the company to the shareholders, and distribute the income (or losses) to them.
How is it different from a normal company then?
A "normal" limited liability company can pay dividends and pay salary to its shareholders. Whatever is left after that is what it pays tax on. A LTC distributes all the profit (or loss) to the shareholders. It's more like a partnership, but with a limited company wrapped around it.
How do you figure out who gets what?
The income distribution is based on the shareholding. So if you have a 90% shareholder and a 10% shareholder, then the 90% shareholder gets 90% of the profits/(loss) and the 10% shareholder gets 10%.
So, what's the point of that?
Many people use LTCs to own their residential rental investment property. A common strategy that financial advisors recommend is to purchase negatively-geared rental property (negative gearing means that the expenses are more than the income). The shareholders have to top up the mortgage with their own money, often $50-$100/week. The LTC then has losses at the end of the financial year. These losses are then distributed to the shareholders. In a rental property scenario, rental losses can only be offset against other rental income
Can you give me an example?
Sure. Mr Smith owns a rental property in his own name, which generates about $11,000 of income (after expenses) per year; he also earns $130,000 per year before tax. Mrs Smith works part-time. They set up a LTC and it purchases a negatively-geared rental property. They put about $125 a week into the LTC to help pay the mortgage. Mr Smith has 99% of the shares, and his wife the remaining 1%. At financial year end (31 March), there are losses of about $10,000. Mr Smith gets 99% of these to offset against his wages. The formula is
Wages + rental income - LTC losses = net income
In this case, it would be
$130,000 wages + $11,000 rental income - $9,900 LTC loss = $131,100
Mr Smith paid $33,820 in PAYE tax, based on his salary of $130,000. Because he can utilise the LTC rental loss and offset it against his personal rental income, he only has a small amount of tax to pay at the end of the year ($363).
See this article for more info and examples of how losses work.
How is this different from a partnership?
Another good question. See this article for an explanation.
I'm convinced. How do I get a Look Through Company setup?
Simple! Fill in the form here and click Submit. We'll send you an invoice, and within 2-3 working days your company should be incorporated. Easy and painless.
I've got a few more questions. Can I talk to somebody?
Sure. Contact us today.
* From 1 April 2019, tax losses will no longer flow through from LTCs that are residential land rich. Please see us or call for advice on how to get the best results from your portfolio, build wealth and minimise tax
What Happens If I Make A Loss?
That's a good question, and it depends a lot on what entity incurs the loss. Let's break down the various types and what effect they have.
Look-Through Company (LTC)
If you are a shareholder in a Look-Through Company (LTC) and that company makes a loss, then you get to carry that loss through to your personal tax return (usually an IR3). There are a few rules and limitations* which we won't go into at length here.
Let's assume you're a salaried employee, and so you've had PAYE deducted from your wages. Well, at the end of the financial year a wash-up is done on your personal tax return. The above-mentioned loss is deducted from your gross (pre-tax) wages. It might look something like this:
-$ 5,000 Loss from LTC which owns rental property
$ 4,000 Income from personally owned rental property
- - - - - - -
$85,000 Net taxable income
-$ 1,000 Rental loss to carry forward to next financial year
We then calculate (a) how much tax you have paid, and (b) how much tax you should have paid. If (a) is more than (b) then you get a tax refund. If the other way around, you have tax to pay.
Limited Liability Company (LLC)
Ok this situation is totally different. If the LLC makes a loss, then it can't be passed on to anyone. Not the shareholders, not the directors: no one.
Instead, it carries that loss forward to the following financial year. If there is taxable profit, then the loss can be offset against that profit. It might look something like this:
$85,000 Net taxable profit
-$ 5,000 Losses brought forward from previous years
- - - - - - -
$80,000 Net taxable income
If there is no profit, then you just keep carrying the losses forward, year to year.
If you have a trust it's the same as an LLC with respect to losses. They can't be distributed out to the beneficiaries. Rather, they get carried forward until there is profit to offset them against.
A partnership works in a similar way to a Look-Through Company essentially. Losses are distributed to each partner, according to the rules of the partnership.
Sometimes you might combine some of these structures.
For example, a trust might own all the shares in a Look-Through Company. The LTC makes a loss. What happens then? In this case, the losses flow through to the Trust. They are then dealt with as explained above.
In the meantime, please contact us with any questions, or talk to your tax professional.
* From 1 April 2019, tax losses will no longer flow through from LTCs that are residential land rich. Please contact us or call for advice on how to get the best results from your portfolio, build wealth and minimise tax
Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!