Should I establish an LAQC?
Question from Kyle updated on 14th September 2006:
Our expert responded:
The short answer is yes, you can offset the expenses of owning and investment property against your personal income. Before just assuming that an LAQC is the way you want to go, the first thing you need to decide is why you are buying investment property in the first place – is it for capital gain and long term investment or because you see there are tax advantages? As you answer this question, bear in mind that the tax advantages are greatest in the first five or so years and then after that, lessen over time.
Look also at your long term investment requirements. The answer to this question determines the appropriate structure. Assuming that you wish to maximise the tax advantages in the short term, then you will wish to use an LAQC. The alternative is to do it in your own name, but as that does not offer you any asset protection at all, I wouldn’t advise it.
The big advantage of an LAQC is that you are able to offset the loss from the LAQC against your personal income, thereby claiming a refund against the PAYE you have paid during the year. The downside is that there is a cost in setting up an LAQC and that in order to get the loss, you have to own the shares personally which won’t help if you want personal asset protection (such as from a relationship).
An LAQC is the same as any other company in that it is registered with the Companies Office. However, to get LAQC status, special application must be made to IRD, and in order to get this special status, each shareholder must give a personal guarantee to IRD that they will meet the company’s tax bill if the company is unable to do so. Naturally, IRD does not like LAQCs, however, as stated above, the effect would be exactly the same if you purchased the property in your own name.
Only having one investment property is not in and of itself a downside. However, there are compliance costs such as accounting fees and annual returns to be filed with the Companies Office, not to mention your time. One property means that this is quite a high cost. The more properties you have, the lower your cost per property as five properties as an example will not cost five times one property – you get economies of scale. And you also diversify your risk so you are not reliant on a single property.
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.