Greg Ninness writes on stuff.co.nz how “LAQCs, once the darlings of the property boom, are on the wane.”
The sleuths at Inland Revenue uncovered nearly $50 million in under-reported tax liabilities from property investments in the last financial year, according to IRD’s latest annual report.
“Enforcement in the property area has identified $48.8m in discrepancies (against our target of $45m) and we received $0.7m in voluntary disclosures,” the report said.
It also noted that there had been a big increase in the number of loss attributing qualifying companies (LAQCs) being deregistered.
Figures IRD supplied to the Sunday Star-Times showed that the number of LAQCs being registered dropped from 16,230 in the 2007/08 financial year to 1216 in the 2010/11 year.
There was a corresponding increase in the number of LAQCs being deregistered, which jumped from 2430 in 2007/08 to 14,906 in the 2010/11 period.
Using LAQCs to own investment property became extremely popular during the last property boom, when many investors paid inflated prices for properties that ran at a loss.
LAQCs allowed those losses to be offset against the investor’s other income, such as that from wages or salaries, which reduced their overall tax bill and made the investment viable, particularly for those investors on the marginal tax rate.
However, such schemes also encouraged the rampant speculation which inevitably led to the most recent market downturn.
New tax rules which came into effect on April 1 this year made LAQCs obsolete for property owning purposes.
Instead investors can choose to hold their property either through a “qualifying company”, which allows losses to be offset against the income a property produces but not income from other sources, or through a “look through company”, which caps investors’ losses at the amount of capital they have put into the property.
The high number of LAQCs being deregistered suggests most investors have adopted the look through company option or transferred the assets to structures such as trusts.