Can I pay capital gains from LAQC without accruing tax liabilities?

Question from Mike updated on 27th October 2006:

My partner and I have an LAQC which owns 3 rental properties, which are operating on a cash flow positive basis but incur losses due to depreciation. Last year we sold a fourth property which was held in the LAQC as we received "an offer we couldn't refuse". As a result of a significant capital gain there is a high level of retained profits in the company. While capital gains are supposedly tax free, to pay them to the shareholders would require declaration of a shareholder's salary, which would bring in to play personal income tax, ACC levies etc. Is there any way the company can pay those retained profits to the shareholders without accruing tax liabilities. My limited knowledge from readings to date suggest the only time this can be done is to either sell all the shares of/ or liquidate the company. Your advice would be much appreciated

Our expert responded:

LAQCs have some rules that give them added flexibility compared to a standard company. LAQCs can distribute capital gains tax free without the necessity of liquidating the company. The capital gains are not paid out as a shareholder's salary. The catch though is that the capital gain can only be paid out as long as the company is in a net positive position. For example, let's say that the net asset position of the LAQC is -$50,000 as a result of losses incurred. You sell one property and have a gain of $60,000. The gain made must first be used to bring about a positive net asset position for the company. Therefore, the maximum tax free capital dividend that the LAQC can pay out is $10,000.


Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.

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