WHY USE A LOOK-THROUGH COMPANY?

Why use a Look-Through Company? In New Zealand, a Look-Through Company (LTC) is a special type of company that allows its income, expenses, tax credits, gains, and losses to be passed directly to its shareholders. Here are the benefits of using an LTC for New Zealand investors:

1. Flow-Through Taxation

• Pass-Through Income and Losses: All income and losses generated by the LTC are passed directly to the shareholders, similar to a partnership. This allows shareholders to offset their personal income with any losses from the company, which can be particularly beneficial in the early stages of a business when losses are common.
• Single Level of Taxation: Since the company’s income is taxed at the shareholder level, it avoids the double taxation that can occur in traditional company structures (where profits are taxed at the corporate level and then again at the shareholder level when distributed as dividends).

2. Flexibility in Income Distribution

• Proportional Distribution: Income and losses are distributed to shareholders in proportion to their shareholding. This provides a clear and direct way for shareholders to benefit from the company’s financial performance based on their ownership stake.

3. Simplified Tax Reporting

• Simpler Compliance: The tax compliance requirements for LTCs can be simpler compared to other corporate structures because the company itself does not pay income tax. Instead, shareholders report their share of the LTC’s income or loss on their personal tax returns.

4. Utilizing Tax Attributes

• Use of Tax Credits: Shareholders can utilize any tax credits earned by the LTC directly on their personal tax returns. This can enhance tax efficiency, particularly if the company is involved in activities that generate significant tax credits.
• Carrying Forward Losses: Shareholders can carry forward losses attributed to them from the LTC to offset future income, providing long-term tax benefits.

5. No Fringe Benefit Tax (FBT) on Certain Benefits

• Reduced FBT Liability: For small businesses, using an LTC can reduce FBT obligations on certain benefits provided to shareholders who are also employees, as some benefits may be treated as distributions of income rather than subject to FBT.

6. Estate Planning and Asset Protection

• Ownership Clarity: Since the LTC structure clearly identifies the ownership of assets and liabilities, it can simplify estate planning and provide a clear framework for succession planning.
• Limited Liability: Shareholders still benefit from the limited liability protection that a company structure provides, shielding their personal assets from business liabilities.

7. Potential for Tax Efficiency in Real Estate Investments

• Deductibility of Interest in a Land & Build Scenario: If property that is being built is bought in personal names, then interest can only be claimed when the property is available to rent. If the build period stretches over many months, then this can mean the investor is paying considerable interest that cannot be claimed. By contrast, the LTC structure allows for the deduction of interest expenses during the build phase.

Conclusion

So, why use a Look-Through Company? While LTCs offer many benefits, it’s important to note that they may not be suitable for all businesses or investors. The decision to use an LTC should be based on a thorough analysis of the specific circumstances, including the nature of the business, the shareholders’ tax situations, and long-term business goals. Consulting with an experienced investment accountant is essential to ensure that the LTC structure aligns with your financial and strategic objectives. Contact us today!