How will LAQC refinancing change under the new rules?

Question from Roger updated on 1st February 2011:

With the changes coming for LAQCs and particularly their alignment with the shareholders marginal tax rates for losses as well as gains, I have a question about loans provided by the shareholder to the LAQC. Currently an LAQC can refinance and repay the shareholder's loans (and possibly even the current account balance) with the resultant new loan being fully tax deductible. Will this change under the new rules surrounding LAQC's? Will the new loan be seen in the same light as an individual who refinances a property to 'pay themselves back'?

Our expert Mark Withers responded:

Good question. Unfortunately at the date of writing the government are yet to release the legislation governing the QC changes so I can't answer it with any certainty. It is being suggested that this may be released by the end of September. It is uncertain at this point whether a shareholders current account would be factored into the base calculation to detetrmine a shareholders investment in the company. It is this calculation that dictates the extent to which losses can be flowed to shareholders. Arguably, a current account is money that the shareholder has at risk in the company but it is debt rather than equity.

The limited partnership rules include in the partners base calculation any debt guaranteed by the shareholder so refinancuing the current account with a bank debt guaranteed by the shareholder may be an option. Remember, there are specific interest deductibility rules for qualifying companies. Interest on debt that refinances a current account is only deductible to the extent that the advances represent contributed capital and can't include credits to current accounts from dividends declared out of unrealised asset revaluation reserves. 

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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