Look through company (LTC) is a fairly new concept to our tax system which was introduced in Budget 2010. Basically the main purpose of introducing LTC is to strengthen our tax system by putting a cap on loss attribution rules.

Look through company rules were applicable from 01/04/2011 onwards and only apply to New Zealand resident companies.

Features of LTC

- Only for income tax point of view LTC is treated differently otherwise for all other taxes such as PAYE, GST and FBT is treated as a normal company.
- LTC do not pay income tax and do not carry forward losses. LTC files its income tax return (IR7) showing income and expenses allocated to its shareholders proportionate to their shareholding. And shareholders file their tax return (IR3) showing they received income and expenses from LTC along with their other income and expenses.
- Maximum five shareholders (husband and wife are counted as one shareholder)
- All owners must agree for LTC election
- Only a natural person, trustee or another LTC may hold share in LTC
- Income & expenses, gains and losses and rebates and credits of LTC are passed to its owners in their shareholding percentage subject to loss limitation rules.
- Loss limitation rules ensure owners can only claim real economic loss. (see the example below)
- Upon transferring/selling shares in LTC, exiting owners will have to account for income derived from selling their share and pay any tax associated with that. However, there is a $50,000 threshold and different rules for trading stock in certain circumstances.

Loss Limitation Rules

Section HB 11 and HB 12 of ITA 2007 covers this concept, this concept is most important as this is related to how much loss an owner can claim against their personal income. Which means an owner can only offset losses to the extent these reflects their economic losses. 
Owner’s deductions are restricted to adjusted tax book value of their investment in LTC (“Owners Basis”) that means amount of deduction cannot exceed owner basis.

Owner Basis = (Investments- Distributions + Income – Deductions- Disallowed Amounts)

• Investments -funds introduced by owners, assets, loans or current account balances.

• Distribution - paid out to the owners, dividends, loans, current account debit balance. No salary or wages

• Income- Owners share of income including exempt income & capital gains
• Current + preceding years

• Deductions- Owners share of deductions & capital losses
• Only preceding years

• Disallowed amounts- This is to prevent artificially created investments, which means within 60 days after the balance date injected investments are disallowed threshold level is $10k, if under $10k ignore this rule

Example 1- Sarah and Henry (husband and wife) opened a café in 2011 using LTC structure to carry their business, where Henry holds 90% shares and Sarah 10%. Shareholder capital is $85k proportionate to their shareholding. During the year company made income of $50k and expenses of $100k

Tax year 31 March 2012

Note- $90k deduction for Henry and $10k deduction for Sarah are allowed as both are less than Owners Basis. If Henry’s owner basis was less than $80k then deductions amount would only be $80k and balance $10k will be carried forward to the next year.

Example 2 - Sarah and Henry (husband and wife) own a rental property which they bought in year 2010, they both guaranteed the mortgage of $400k. In year 2010 this was LAQC which they converted to LTC in 2011. Rental income $20k and expenses $40k every year. Their shareholding % is same as above example.
First year 31 March 2012

Second year 31 March 2013 

Note- in both years deductions are allowed, over the years Henry’s owner basis will reduce faster than Sarah.

About the author:

Saurav Wadhwa is an Auckland based chartered accountant and a director of IBBZ Accounting Limited. Saurav is a tax specialist with Masters in Tax with Distinction (Auckland) and have 10 years of experience in the industry. He is very passionate about helping small business owners. His easy going personality and a friendly nature makes him easily approachable. For all your tax problems including overdue tax returns, management of tax debt, tax consultancy, and IRD audits & disputes  you can contact him at This email address is being protected from spambots. You need JavaScript enabled to view it.  or 027 5555 458.

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Information above is provided for general use only, if you are intending to rely on any of the information above please consult with us or seek a professional advice. If information provided above result in any kind of loss to you we can not be held responsible.