Business taxpayers in New Zealand requiring a simple way of splitting their earnings should consider using Look Through Companies.
Look Through Companies allow the profits of a company to be passed directly to shareholders. This means that their profits are split according to the shareholdings.
So, for income tax purposes, the profits go directly to the shareholders’ personal income tax returns. There are no company tax returns, no company tax, and no imputation regime. If the shareholdings are a typical 50/50, the profits are divided 50/50.
Both profits and losses can be transferred to shareholders.
Business people can get all the benefits of a limited liability company with a simple income tax arrangement.
In 2010 the government was keen to see an end to loss attributing qualifying companies (LAQCs). Look Through Companies were created as an alternative structure. The legislation also allowed new companies to become Look Through Companies when filing the first income tax return.
In the simplest terms, Look Through Companies are companies for all purposes except income tax. They must comply with general company law. But for tax purposes, they are treated as partnerships. Shareholders get the benefit of having a separate entity for their business and of limited liability with none of the complications of company tax and the imputation credit regime.
There are a few potential fishhooks to avoid. But if there are settled arrangements (as there usually are for a couple setting up in business) they are easily managed or avoided.
One potential problem in the management of differing incomes. Say, for example, one of the shareholders deserves a greater share of profits. In an ordinary company you would allocate a higher end-of-year shareholder-salary. With Look Through Companies, you must put that person on a regular salary and enter into a formal employment arrangement. This requires regular payments and PAYE deductions.
However, for business couple earning up to $96,000 annually, using Look Through Companies is effective in dividing earnings.
Any business couple wishing to split profits for income tax purposes should look carefully at the advantages which Look Through Companies offer.
Call Michael on 09-401-6261 to discuss.