This means that unless people make use of the transitional concessions, their ex-LAQC or QCs 2011/12 tax losses will not flow out to shareholders to offset their other income.
Instead the QC’s losses will be locked in the company and can only be offset against future profits of the company.
Shareholders of QCs have until 30 September 2011 to either:
a) File an election to become a Look-through Company (LTC) or
b) Revoke QC status and give written notice to the IRD stating the intention to complete either the QC Partnership transitional process or the QC Sole Tradership transitional process.
By filing the relevant election/notice within time (by 30 September 2011) and completing the process within the 2011/12 year (by 31 March 2012), any business losses in the 2011/12 year and future years losses may be taken up in the individual’s tax return for the relevant year.
Failure to make the necessary election by 30 September 2011 will mean that business losses for the 2011/12 tax year will be retained in the company and will not be available to shareholders to offset against other income (Note that loss limitation rules apply for LTCs and Partnerships).
Transitioning into a LTC or one of the other structures means the taxable income of the business will flow into the individual’s tax returns and the company will pay no tax. This means that profits will be taxed at the individual’s marginal tax rate instead of at the flat company rate of 28%.
The costs and benefits of transitioning from a QC should be carefully weighed before making a decision on whether to make use of the transitional rules.
If you have an ex-LAQC or QC and intend making use of the transitional rules we strongly recommend that a decision about the transition process is made and enacted by 30 September 2011.
While 30 September 2011 is the latest date that the transitional rules can be enacted for the 2012 year, shareholders have until 31 March 2013 to transition (transitioning after 30 September 2011 means that the transition will not take effect until the 2012/13 year; there may be additional tax consequences of leaving the transitioning process until the 2012/13 year).
Please contact a UHY Haines Norton Director if you would like to discuss the transition process for LAQCs/QCs.