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.

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.

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:

 $85,000 Wages 
-$  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.

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

In this blast from the past (2013), Daniel Carney of Goodlife Financial Advice brings you this insightful interview with Garreth Collard, Principal at EpsomTax.com 

The topic in question is whether an LTC is the right ownership structure for your Residential Investment Property. We pick Garreth's brain to get to the heart of whether an LTC is right for you. A 'must see' for any investment property owners!

Topics Discussed are:

• What is an LTC?
• Who would benefit from setting up an LTC?
• Partnership or LTC: which is better?
• How do you set up an LTC?
• How do you manage the LTC?

Inland Revenue released a Tax Information Bulletin (TIB) in September 2019, which clarified this.

For the purposes of this blog post, we are going to assume that the LTC or an individual only holds residential rental property i.e. no commercial, they are not a trader or an associated person or a developer etc, they don't have an Airbnb-style short-stay accommodation house in the picture.

Can losses from an LTC with residential rental property be offset against income from rentals owned by a partnership or in your personal name?
It depends on whether

1. the LTC decides to apply the ring-fencing rules on a portfolio basis or on a property-by-property basis.
2. the shareholders have any other residential rentals with income/loss to offset against this

However, the answer is essentially, "Yes", if:

1. you have decided to use a portfolio basis for the LTC (that is spread the losses and profits out between the various properties owned by the LTC) 
2. you have at least one residential rental property held in your own name or in a standard partnership i.e. we are not commenting on "limited partnerships" here

So the result is, you can have a negatively-geared LTC, and given the above points, the losses can flow through to you as a shareholder. You can then offset this against profits from a personally-owned rental (either solely owned or in a partnership). The situation also works in reverse ie there are profits in the LTC and losses in the personal/partnership rental.

Note that you can't offset any losses against income from other sources e.g. wages, like you used to in the good old days. That is what the concept of "ring-fencing of losses" means. The losses are "ring-fenced" so that they only apply to residential rental property.

Some interesting points

• If an LTC applies the rules on a property-by-property basis, the shareholders have to also take that approach in their returns. If it applies the rules on a portfolio basis, ditto.
• This is not the case for partners in partnerships. If a partnership has filed a partnership return applying the rules on a particular basis, the partners do not necessarily need to apply the rules on that same basis. So a partnership now gives much more flexibility than the LTC in this one respect.

​
Do restructure strategies such as selling your old family home to an LTC still work?
We have previously recommended this, in blog posts such as this one.  The answer is now a big "no." Why? Changing ownership structures will now not shift/change non-deductible debt into deductible debt in any residential investment property scenario, including short-stay accommodation. For more info, see this blog article

For more info, the IRD Sept 2019 TIB is below

As always, situations vary, so please contact us for advice on your specific situation. Call 099730706 or email us here

You have a rental property. Can you claim your holiday as an expense? If you spend time travelling as part of your business you can claim business travel as an expense. A good way to prove the business portion of your travel expenses is by keeping a diary of your travels.

In addition to keeping invoices, receipts and tickets you should also keep details of:

• the date of the trip
• your itinerary
• the cost of car hire, and air, bus and taxi fares
• the cost of accommodation, meals and incidentals
• the time spent on business and non-business activities
• letters of introduction
• business contacts/cards
• firms visited
• business conducted/reasons for the trip/visit to firm

So how does the rental pay for my holiday?  
Well, the first thing is to remember that there is no such thing as a free lunch - or a free trip - unless you win a competition or have a wealthy benefactor!  However, there are such things as a tax-deductible trip, if not 100%, at least in part.

If you'd like to claim your holiday as a tax-deductible expense, then you need to

1. be visiting your rental property which is in your holiday destination on on the way to it
2. pre-plan all business activities related to it, i.e. set up your business appointments, e.g. real estate agents, insurance brokers, accountants, lawyers etc, before you go on your trip.  That makes it really clear why you are going.  Plus, keep records as per the list above.

Then, your LTC/trust/partnership etc can claim tax deductions for some or all of the trip and other necessary expenses: hotels, car, meals, travel etc. Note however that there are some gotchas:

That leather jacket is not tax-deductible
Let's say you are in Queenstown, and you see a nice leather jacket.  So, you buy it.  The trip is 100% tax-deductible, because it meets all the criteria above.  Can you claim the leather jacket?  No.  The guideline is "what is the nexus between this expense and the business activity?"  If there is no clear link or nexus, then the item is not tax-deductible. In this case, what does a leather jacket have to do with your rental property?  Nothing.  So it is clearly not tax-deductible. 

Don't go overboard with your expenses.  
Always remember that tax concessions allowed are based on what the hypothetical "reasonable" person would do.  A reasonable person would not eat out at the swankiest restaurant every night they were away.  They might do that once, but not every night.  So, don't get carried away.

Non-business parts of the trip are not deductible
Let's say that you arrive in another part of the country to inspect your rental property, meet with suppliers and possibly purchase another rental. You have a few days' worth of appointments set up, but you have planned to also take a few days to rest up as well.  The total trip is 10 days, with 3 days' business pre-planned, and the rest being vacation.  Therefore, you cannot claim the entire trip as a business expense. Instead, work out the proportion related to business (30%, in this example), and claim that percentage of the costs.

Can we claim for both of us then and the kids too?
Highly unlikely. Your children are likely not active working partners of your LTC etc, so you would have to make further adjustments to exclude costs related to their stay.  What about your spouse or partner?  Well, is your significant other a part of the business, e.g. a director of the company? A trustee of the trust (that owns the rental)? Are they actively involved in the taxable activities of the LTC? Is the firm/professional you are meeting at your destination expecting to meet both of you? Then likely yes you can claim.

Questions?  Please feel free to contact us.  And for clients, before you go away, please please please contact us. 

You've established that there are good economic reasons for changing the shareholding in your LTC that owns rental residential property. You and your life partner are the shareholders. What things do you need to consider so that you don't get hit with a nasty (and unexpected) tax bill?

Let's say that the company owes the shareholders $150,000. This is tracked in the Shareholders Current Account, and is a liability (debt) of the LTC.

Bob has 99 shares, and Mary has 1. Bob will sell/transfer 49 of his shares to Mary so that they each have 50 shares.  Let’s say at the moment, Bob and Mary are owed $75,000 each by the company.  

The LTC has made losses so is technically “insolvent”. The ramification of this is that as 49% of the shares are transferred there is a deemed disposal of 49% of the both advances being a total of $73,500  at a market value of zero (due to the company being insolvent).

Under special tax rules the $73,500 is initially deemed to be income of the LTC to be taxed to the owners in proportion to their shareholding (Bob $72,765 and Mary $235).  Under recently-amended income tax rules, this income will not be taxed to the extent it is in proportion to shareholding. In this example Bob has debt of 50% for a shareholding of 99% and Mary has debt of 50% for a shareholding of 1%. Under the new rules he will be taxed on 49% of the debt being $73,500 and Mary will not have taxable income.

In this scenario, the de minimis* threshold of $50,000 would be exceeded when Bob transfers his shares (as the deemed income is $73,500). This same issue arises when either the LTC status is revoked or the company is wound up.
 
Going forward, ideally all LTC shareholder debt should be in proportion to shareholding. Between family members this can be achieved by way of an assignment of debt as that is another way of presenting what is happening. Then going forward debt should be transferred along with shareholding so the debt stays in proportion.

Is the cost of any of the LTC’s depreciable assets more than $200,000 each?  If so, you then need to ask: Is the value of the accumulated depreciation on assets per shareholder more than $50,000 (the "de minimis" threshold)?  If so, then there could be tax implications.

Be aware that changing shares now (or ownership % in a partnership) partially starts the 10-year Brightline Test again. 
 
For example, if you moved 5 shares (of a total of 100) from you to your wife, then sold the property within 10 years of that change, then 5/100 (5%) of the sale profits (sale price less fees less original purchase price = sale profits) would be classed as taxable income (for the person who “sold” the shares).
 
So, if the gain was $100,000, 5% is $5,000. So in this scenario, $5,000 would be taxable income.

Please contact us for advice. You may also want to read this related blog article "Are Tax Benefits a Good Reason to Make Changes?"

* "de minimis" is a Latin expression meaning about minimal things, normally in the locutions de minimis non curat praetor ("The praetor does not concern himself with trifles") or de minimis non curat lex ("The law does not concern itself with trifles") a legal doctrine by which a court refuses to consider trifling matters.

You and your significant other each own 50% of the shares in an LTC. It owns negatively-geared rental property.  At tax time, you get your 50% share of the loss, which generates a nice tax refund.*

Previously you both earned about the same, but now there is a child in the mix, and one of you is working less as a result, and earning less as a result.

Suddenly that 50/50 company shareholding doesn't look so good. Should you change it to 99/1 to get better tax refunds?

The short answer is no.  If you do anything with the motive to purely pay less tax, then you leave yourself open to being accused of tax avoidance.

What to do then? Well, there may well be economic reasons for the change, which had not previously been considered. When you take these into account, any so-called tax benefits could well become purely incidental.  

As each situation is different, it's not practical to outline these here, so please feel free to contact us to discuss.

​You may also wish to read a related article: Changing Shares in LTCs: Considerations

* 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

NZCO is short for New Zealand Companies Office.It is part of MBIE (Ministry of Business, Innovation and Employment) and administers a number of registers, including a register of companies, their directors and shareholders, and related documents.

All companies are required by the Companies Act 1993 to file an annual return with the Companies Office regardless of whether or not they are trading.

If an annual return is not filed by the due date, the company risks being removed from the register as the Registrar may be satisfied that the company has ceased to carry on business.

An annual Companies Office return is not a tax return, it's simply an annual requirement for a company to provide certain details to the Companies Office.
​
For more details, see this page at the Companies Office.

We certainly do. At this time, we don't charge for filing your annual Companies Office return. Most accountants charge $80-$100 + GST, but we don't. Honestly, it only takes a minute or two so we don't feel we can justify charging for it.

We also offer an optional compliance package, which we'll contact you about at the same time.  Questions? Please contact us.

Yes, it is a requirement for all NZ companies. But don't despair! It's a great chance to go out for dinner on the company. Keep your receipts for the meal, drinks, taxi, babysitter.  While you're out (or shortly thereafter), make sure to complete this annual meeting form, which will be sent to us when you click Submit. You can even attach your receipts to it!

As always, if you are not sure or need more information, please don't hesitate to contact us.

Also known as: How do you make an LTC election?

It's reasonably straight-forward. Once the company is incorporated (click here if you want us to do this for you), you then complete and send off an IR862:

Section 1 is fairly self-explanatory, although you may come unstuck at the part where it asks you to choose the income year. Accountants always refer to the financial year as the one ending next March. For example, if today is the 31st of March 2015, then we are in the 2015 financial year. However, if today was the 1st of April 2015, then we would be in the 2016 financial year.  So make sure you put the right financial year on the form!

In Section 2 you repeat some of the information from Section 1, and then fill in the details of the Owners. The bits you need to fill in are:

• Owner's Name
  
• IRD Number
  

then sign and date the form.  

Send this to us, or post it directly to:

Inland Revenue
PO Box 39010
Wellington Mail Centre
Lower Hutt 5045

Make sure you read the instructions on the back, as you can only have a maximum of 5 Owners.  

The other thing we'd usually get you to do is complete a resolution, assuming you are purchasing property.  Download our sample resolution below for free.

Excellent question.  Let's assume you have

1. Your own home, with a mortgage
2. A rental property, with a mortgage

What do you want to achieve? In order of priority:

1. Pay off the family home
2. Ummm, I haven't thought much past that.

Don't panic! We can help.

So, how should you structure things to obtain this 
no. 1 objective as fast as possible?

Now, at this point you may be wondering why you should do that.  Well, it comes down to "good debt vs. bad debt."  What do we mean by that?

Good debt
This is tax-deductible debt. Debt on your rental property is tax-deductible. So it is "good" debt in that it is working for you. 

Bad debt
Debt on your family home is not tax-deductible (although if you run a business from home then a small portion will be), so it does nothing for you. It is "bad" debt from this point of view.

So, logically, you want to drive down the "bad" non-deductible debt as soon as possible, and give this priority over debt that is working for you

Here are our six key recommendations:

1. Have the rental mortgages on interest only (not interest and principle)
   
2. Have your home mortgages on interest and principal
3. Have a floating interest rate mortgage transaction account for the rental out of which all bills are paid/other rental loans funded/rent comes into, e.g., $30,000. Some banks allow this.
   
4. Have both your personal and rental lending split into 2-3 loans e.g., 3 year fixed, 5 year fixed, 1 year fixed.  This gives you options re interest rate changes
   
5. Hit the bank up for a contribution to legal fees; typically this is $2,000-3,000
   
6. Insist on weekly mortgage repayments. It'll reduce the amount of interest you have to pay
   

No. That's what a mortgage advisor does. We recommend that you have a talk to Velocity Financial.

What's the benefit of selling my rental to an LTC?
There are numerous benefits, but one key one is that it allows you to increase good debt and decrease bad debt. This is because you can sell the rental to the LTC at market value (you'll need a registered valuation), and then adjust the mortgage upwards on the LTC in line with that value, and readjust the mortgage downwards on your own home.  The end result is that the total mortgage amounts are the same, but you've now in effect turned a lot of bad debt into good debt.  Note that in some circumstances you can simply revalue without needing to set up an LTC.  Talk to us about your options.

I want to buy a better family home or upgrade it. Is that borrowing tax-deductible?
No. For interest on loans to be tax-deductible there has to be a business purpose.  However, if structured correctly, then extra funds can be raised for a business purpose.  Again, talk to us about this.

What do I do after I've paid off my family home?
Well, even before you've paid that off completely you have options. You might be surprised at how soon you have equity in your family home and in your rental. This allows you to leverage into another property.  However, you are best to get advice from an Authorised Financial Advisor about this. They are the only ones who are licensed to give you specific financial advice.  Contact us for more information.

Is an LTC the right structure for my rental investment property?
Probably. Watch this short video, then call us to discuss your specifics on 0800 890 132.

Do you have any other information on this stuff?
Yes, check out our FAQ page and also these blog articles