Tax impact from LAQC changes

Question from Judy updated on 1st May 2013:

My husband and I had an LAQC which has now defaulted to a QC because we didn't make the election to change to a LTC by September 30th. We have sold our rental property and have a loss (even after depreciation recovery). We are now using the company for some consultancy work we are doing and will make a profit so I have three questions:

1. Can we carry the loss from the 2011/12 tax year forward to offset against future profits in the QC?

2. Would we be better to elect to change to a LTC for the following year? We are both higher rate tax payers and the profit in the company will only be about $10,000 per annum.

3. I understand that the comany will only be taxed at 28% whereas our nominal tax rate is higher, but does it make a difference anyway as we will be personally taxed on any money we take out of the company?

Our expert Mark Withers responded:

Yes the loss in the QC will carried forward provided it is not the loss on disposal of the property you are refering to. Only the rental losses are deductible, not the capital loss on the property. Your ability to offset the loss against the consulting profits is determined by whether you are caught by the attribution rules on the consulting work. If 80% of the personal services income is generated from one customer the attribution rules apply and no loss offset is available. The Government did extend the transition to LTC election date to 30 September 2012 but the loss for the 2012 year will still be ring fenced if you elect in before then. If you elect to become a LTC after the transitional deadline the losses are wiped on entry into the regime. If ultimately the company will be profitable remaining as a QC should be an acceptable option and does offer you the 28% corporate tax rate if the profits remain in the company. As you say though, if you intend distributing the company profits as dividends the extra 5% tax must be paid anyway. They get you in the end one way or another !

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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