That's a good question. What is a Look Through Company or LTC?
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. This, in turn, usually generates tax refunds, which help pay for the property.
Can you give me an example?
Sure. Mr Smith earns $130,000 per year before tax. Mrs Smith isn't working. 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 $20,000. Mr Smith gets 99% of these to offset against his wages. The formula is
Wages - LTC losses = net income
In this case, it would be
$130,000 - $19,800 = $110,200.
Mr Smith paid $33,820 in PAYE tax, based on his salary of $130,000. However, the tax on his adjusted income is $27,286. So he has overpaid his tax by $6,534. This amount is paid back to him as a tax refund. As this averages out to $125/week, this effectively pays for their mortgage top ups.
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.
Accounting for your rental residential investment property; general taxation advice.