We own our property in an LAQC – what must we do now?

Sandra and Mark were shareholders in a Loss Attributing Qualifying Company (“LAQC”) which owned their rental property in Wellington. They set it up this way as the income received from the property was not enough to cover the outgoings for the property. LAQCs have been abolished due to changes in legislation which came into effect on 1 April this year. People who have LAQCs need to make an election to transition into a different type of entity.

The options for transitioning from an LAQC are as follows:

1. Elect for the company to become a Look Through Company (“LTC”) which is a limited liability company, that can pass on its income, expenditure, tax credits, rebates, gains and losses to its shareholders in accordance with their shareholding in the company;
2. Elect to become a partnership or sole trader;
3. Revoke your QC status and therefore become an ordinary company taxed at the ordinary company rate;
4. Do nothing and therefore turn into a qualifying company (which results in an inability to attribute losses to shareholders).

An election must be filed with the Inland Revenue Department within six months of the start of the transitional year (being a choice of one the first two years after 1 April 2011). Companies opting to become sole traders or partnerships have until the end of the transitional year to transfer ownership of properties, re-document mortgages, and either liquidate or become non-active.

If you have an LAQC and you haven’t already spoken to your accountant or lawyer, you should do so urgently. Your lawyer will be involved in transferring the property owned by the LAQC and arranging for your mortgage documents to be re-documented.