Taxation status of LAQC under the new regime

Question from Robert updated on 18th November 2010:

Can you please explain in laymen's terms the taxation status of LAQC under the new tax law? Could losses be claimed against the personal tax of the owners?

Our expert Mark Withers responded:

Ok, the gist of it is that the company will be taxed in the same way as a limited partnership which is a flow through entity. There are two or three key issues.

Firstly, losses can only flow out if they are less than a shareholders economic exposure to the company. This shouldn't be too problematic given that any company debts guaranteed by the shareholders will be included in the calculation of economic exposure.

Secondly, changes in shareholding will trigger a deemed disposal of the sellers share of the underlying assets of the company eg, transfer half the shares to your wife and have to pay tax on half the depreciation recovery.

Thirdly, If the company is profitable, dropping out of the QC regime will allow the company to pay tax at 28% rather than the 33% payable personally. Remember though that dividends distributed by non LAQC companies from either revenue or capital reserves are taxable. This results in the company needing to be liquidated if a capital gain is too be distributed to shareholders tax exempt if it isn't a QC. 

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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