WHAT IS A LOOK-THROUGH COMPANY? (LTC)

What is a Look-Through Company? This structure – also known as a LTC – is a unique business structure in New Zealand that combines the legal benefits of a limited liability company with the tax advantages of a partnership. Introduced in 2011 as a replacement for the Loss Attributing Qualifying Company (LAQC) regime, LTCs allow income and expenses to flow directly to shareholders, who then report these figures on their personal tax returns. 

Key Features of a Look-Through Company (LTC):

• Flow-Through Tax Treatment: Unlike traditional companies that are taxed at the corporate level, an LTC’s profits and losses are passed directly to its shareholders. This means shareholders are taxed individually on their share of the company’s income, aligning with their personal tax rates.

• Limited Liability Protection: Shareholders enjoy protection from personal liability for the company’s debts and obligations, similar to standard limited liability companies.

• Shareholder Restrictions: An LTC can have up to five shareholders, and all shares must confer identical rights, ensuring equal treatment among shareholders.

Advantages of Using an LTC:

• Tax Efficiency: For businesses or investments that may incur initial losses, such as start-ups or negatively geared rental properties, shareholders can offset these losses against other personal income, potentially reducing their overall tax liability.

• Simplicity in Tax Reporting: The flow-through nature of LTCs simplifies tax reporting, as income and expenses are declared on shareholders’ personal tax returns, eliminating the need for separate corporate tax filings.

• For more information on some use-case scenarios, see this article

Considerations and Limitations:

• Loss Limitation Rules: Shareholders can only claim losses up to the amount of their economic investment in the company, preventing the use of excessive losses to offset other income.

• Bright-Line Test Implications: Changes in shareholding or electing LTC status can trigger implications under New Zealand’s Bright-Line Test for property sales, potentially affecting tax obligations on property transactions.

• Residential Property Investments: Recent legislative changes have limited the ability to offset rental property losses against other income, reducing the tax benefits of holding residential rental properties in an LTC structure.

Establishing an LTC:

To set up an LTC, a company must:

• Be a New Zealand resident company.

• Ensure all shareholders are either individuals, trustees, or other LTCs.

• Obtain unanimous agreement from all shareholders to elect LTC status.

• File the appropriate election forms with Inland Revenue within the specified time frames.

• More info here

Conclusion:

A Look-Through Company offers a flexible and tax-efficient structure for certain business activities and investments in New Zealand. However, it’s essential to check recent legislative changes and specific circumstances before opting for an LTC. Consulting with a tax professional or accountant can provide tailored advice to determine if an LTC is the most suitable structure for your needs. Call us today on 09-973-0706, ext 2