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Latest News [index] LAQCs and the family home - are you feeling brave?
LAQCs AND THE FAMILY HOME
Loss attributing qualifying companies, more commonly referred to by the acronym LAQC, often feature in asset and estate planning. The most significant difference between an LAQC and a regular company is that losses can be passed to shareholders rather than carried forward, as is usually the case. However, the trade-off for this is that shareholders assume personal liability for income tax payable by the company to the extent of that shareholder's interest in the company.
An LAQC can be a useful vehicle for investment. For example, if you are planning to invest in rental properties, you might elect to incorporate an LAQC, which will purchase those properties. The use of a company provides a buffer between you and your tenants, while any losses incurred can still be set-off against your personal income. This is a legitimate use of an LAQC.
However, the Inland Revenue Department ("IRD") has advised its concern where taxpayers sell a family home to an LAQC and then claim tax deductions for what are really private expenses. Even if a market rent is paid to the LAQC, this type of an arrangement can amount to tax avoidance.
In this regard we note that in a recent case on this point the Taxation Review Authority ruled in favour of IRD finding that claiming tax losses through an LAQC that owned a single home that was occupied by the company's shareholder was tax avoidance.
Although that decision does not go so far as to find that there will necessarily be a finding of tax avoidance whenever losses are claimed in respect of a family home owned by an LAQC, the matter is one of scale and degree. If an LAQC owns a number of residential investments, one of which is rented to a shareholder at market rates, this may be acceptable to the IRD. That said, even where there are multiple investment properties and all dealings are at arm's length, care is recommended and a prudent taxpayer would still be wise to consider a different ownership structure for a family home.
If you would like more advice on whether an LAQC is for you, or if you have concerns about properties owned by an LAQC, please contact a member of the Ayres Legal team.