LTC for the Rental Property Investor
If you own one or more rental properties, you could save money by setting up an LTC. The LTC structure allows you to transfer profits and losses from your investment properties to your personal income. So, by off-setting any losses you make through your rental property, against the income you earn from other sources, you can reduce the rate of tax you pay, and save more money.
What is an LTC or Look-Through Company?
A Look-Through Company is the same as the traditional limited liability company, established in accordance with the New Zealand Companies Act of 1993; However, the laws differ regarding the taxation of the company’s income.
An LTC is unlike a typical company in that the income and expenditure of the company are expressly in the hands of the shareholders. In fiscal terms, this creates a transparent mechanism that is identical to the New Zealand limited partnership. In notable contrast to the former rules regarding LAQCs, LTC shareholders have an obligation to pay taxes on the profit of the company personally, as well as being able to claim losses generated by the company against their other income for tax purposes.
- An LTC is a legal entity under the usual rules of management and operation of companies of limited liability.
- In the realm of taxation, LTC is more transparent and the owner(s) of an LTC will be considered the owner(s) of the company’s assets in order to calculate income tax.
- Income, expenses, tax credits, deductions, gains and losses of the company are transferred to its owners in proportion to their share in the company.
To obtain the status of the LTC, a company must meet the following criteria:
- A company which resides (tax-wise) in New Zealand; this residency is determined by the location of the company itself and not its shareholders.
- The company’s shares can only belong to individuals or managers of a trust, or other Look-through company, to be shares of the same class and to give equal rights to all shareholders.
- The number of shareholders of such company shall not exceed five shareholders.
Income from LTCs is taxed after deducting the expenses of the company. The share of these revenues and expenses is transferred to shareholders according to their share in the company. Earnings from the company are taxed at the personal tax rate, even if it is more or less than the standard income tax rate for New Zealand companies.
This is a significant point of difference with the LAQC.
The rule limits the number of damages similar to those that apply to limited liability companies. Owners can take into account only the economically justified costs. Losses that can not be claimed in the current period can be extended to subsequent years (periods), but only within the amount of participation of the shareholder.
LTCs deliver declarations showing the distribution of income and expenses to shareholders.
Disclaimer
The information provided in this article is not intended to provide a comprehensive statement of advice. Please consult an expert for advice specific to your own circumstances and what you want to achieve.
