How do I add my wife to my LAQC?
Question from Investor Newbie updated on 14th September 2006:
Our expert responded:
This is a great question that is fraught with difficulties for those who aren’t aware of the pitfalls. My first piece of advice is not to attempt to try and do this yourself, but instead to enlist the help of your accountant. Whatever the fee is, it will be a small price to pay compared to potentially losing your ability to offset the losses against your personal income.
In any company, LAQC or not, you can make whatever changes to the directors as you see fit. It is absolutely no problem to add your wife as a director. However, you can not just make changes to the shareholding willy nilly. Companies have tax rules that they have to meet if they want to keep their tax losses or imputation credits and carry them forward to future years. These rules are called the continuity provisions and mean that 66% if the shareholding must remain the same from year to year. In addition to that, an LAQC has other provisions that it has to meet such as new shareholders coming in have to give personal guarantee as well (form IR436).
For these reasons, it is absolutely essential that the shareholding of an LAQC is set up correctly from day one with the shareholding reflecting the income of the shareholders, eg if the salaries of a husband and wife are similar, a 50/50 shareholding may be appropriate. It depends on the income and there are other issues that may be a factor in this decision. A change to the shareholding could easily exit an LAQC from the LAQC regime meaning that the losses for that year will not be able to be offset against your personal income. Another application would then have to be filed and as the LAQC is already trading, it will not take effect until the next financial year. So you will lose an entire year of losses. The company will be able to use of the losses and offset those losses against future year profits, but you will not be able to offset that year’s loss against your personal income. So while it may seem like a small change, it can have quite far reaching implications.
Talk to your accountant. It may be that you want to make the shareholding 50/50. If that’s the case, in order to maintain LAQC status, the shareholding change may have to occur over a couple of financial years. In terms of the LAQC needing some money for the deposit on the next rental, this is easily done by way of a loan from you to the company, through your shareholders loan account. You can find this in the balance sheet or statement of financial position – two names for the same thing. When the LAQC has spare cash available, it can use the cash to make repayments against the loan.
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.