Tax & LAQC

Taxing Qualifying Companies

Intercompany dividend exemption
The income tax exemption for dividends does not apply to qualifying companies that receive dividends from a wholly owned subsidiary. Any dividends received are taxable and the qualifying company may claim any imputation credits attached. Dividends received from foreign companies will remain exempt because they will be subject to foreign dividend withholding payments on receipt.

Subvention payments and loss offsets
Qualifying companies with a net income are unable to make subvention payments or receive a loss offset from a non-qualifying company. This restriction does not apply to qualifying companies who have a net loss or where both companies are qualifying companies. However, LAQCs must attribute losses to shareholders instead of offsetting to group members.

Fringe benefit tax (FBT)
If fringe benefits are provided to shareholder-employees, the expenditure incurred in providing those benefits is fully deductible, provided it meets the normal deductibility criteria and the company is liable for FBT. The benefit is non-assessable to the shareholder-employee. If fringe benefits are provided to shareholders who are not employees, the expenditure is not deductible to the company and non-assessable to the shareholders, and the company is not liable for FBT.

Fringe benefits may affect the tax deductibility of interest on money borrowed by the shareholders to purchase shares in the qualifying company —see “Deductible interest on money borrowed to purchase shares” on page 43.

Taxing Shareholders

Dividends received from a qualifying company
When a shareholder receives a dividend from a qualifying company, they will be advised what portion is taxable, and therefore what should be returned in their individual tax return. Any dividends received will be fully imputed, so there should be no more income tax incurred.

Exempt dividends distributed to beneficiaries
Exempt dividends paid to trustees will retain their exempt status when passed through to beneficiaries.

Deductible interest on money borrowed to purchase shares
If a shareholder who is not an employee, or any person associated with the shareholder, has borrowed money to purchase shares in a qualifying company, the interest incurred is not deductible to the extent of any taxable dividends (other than taxable bonus issues).

The amount of interest allowed as a deduction will be reduced by the value of any non-cash dividends (other than taxable bonus issues) the shareholder derives in that income year, for example, low-interest loans or the provision of a car.

These rules do not apply to shareholder-employees. If a shareholder employee derives a non-cash benefit from a qualifying company, the benefit will be subject to FBT and as such it is not a dividend. This means any interest deduction should not be reduced by the value of the non-cash benefit. The rules in respect of the deductibility of interest include non-cash dividends received by people associated with the shareholder.

Deduction for attributed loss
If a taxpayer is entitled to claim an attributed loss but the amount will not be quantified within the time required to file their individual tax return, they have two options. They may:

  • Seek an extension of time for filing their return, or
  • Return the loss in the following year’s tax return. No formal application is required for this option.