Setting up an LAQC

Question from Judy updated on 1st May 2007:

Should we set up an LAQC? We are in the process of buying our first investment property and the rent will not cover the mortgage. My husband pays tax at the higher rate and we have been advised to set up an LAQC rather than put the house in our own names. With an LAQC, do you have to wait until the end of the financial year to benefit from the tax advantages or can an adjustment be made to PAYE deducted with a different tax code? Is an LAQC the best option?

Our expert responded:

Whether or not you should set up an LAQC is dependent on your long term plans, rather than tax. New Zealanders seem to be pre-occupied with the tax benefits of investing in property, when it should be the deal itself that is of most importance in determining whether or not the property fits your investment criteria. Property investing is a strategic decision, not a tax decision.

Right, now I'll get off my soapbox. In answer to your question, you do really need to look first at your long term plans, and your long term plans will tell you what sort of a tax structure you need. In order for a company to become an LAQC, it must apply to IRD and each of the shareholders give a personal guarantee that if the company is unable to pay its tax bill, the shareholders will. This is a managed risk because it is within the control of the directors of the company.

However, the losses that arise from owning a property in an LAQC are good generally in the first five years and after that, the property can move into a tax paying position, which in itself brings another host of questions that need to be answered. If you said that you might buy one, at most two, investment properties, then I would probably say go for an LAQC, as the cost for setting up a trust may not be appropriate, although personally, it would be my first choice before considering anything else.

Setting up an LAQC is much better than buying the property in your personal names because through the LAQC, you get limited liability as a result of the LAQC being a company. When you have an LAQC, you can apply to IRD on an IR23BS (see the IRD website www.ird.govt.nz). If approved, you get a certificate from IRD which you give to your employer and they use that tax rate instead of the standard tax rate, when deducting your PAYE from your wages or salary.

Before making a final decision, invest some time and money with a tax structuring expert to ensure you make an informed decision. It is expensive to make changes after the fact, along with the possibility that you might not be able to make any changes anyway.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth. She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.



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