Look-through companies − miscellaneous amendments
(Clauses 33 to 36, 88 and 150)
Summary of proposed amendments
The bill contains several remedial amendments to the look-through company (LTC) rules in the Income Tax Act 2007 and the Goods and Services Tax Act 1985 to ensure the rules are consistent with the original policy intent.
The amendments cover:
- Qualifying company amalgamations
- Tax elections, and valuation and timing methods
- Disposal of financial arrangements
- Fringe benefits provided to working owners
- Flat-owning companies
- Look-through counted owner test
- GST group-filing rules
Except where indicated otherwise, these amendments will apply from 1 April 2011, when the LTC rules became effective.
Qualifying company amalgamations (Clause 33)
When the LTC rules were introduced, the qualifying company (QC) rules were grandparented. The intention was that no new companies could use the QC rules after 1 April 2011; only companies that were already QCs (including loss attributing qualifying companies before that date could continue to use the QC rules.
This amendment ensures that a new company cannot enter into the QC rules through an amalgamation that is not a resident’s amalgamation. The amendment provides that following an amalgamation between a non-QC company and a QC, the resulting amalgamated company cannot use the QC rules.
The amendment will apply to amalgamations on or after the date of enactment.
Tax elections, and valuation and timing methods (Clause 34)
This amendment provides that elections concerning the tax treatment of an LTC’s income or property, or any valuation or timing methods adopted in relation to an LTC’s income or property, are made or established by the LTC, not each owner. The elections made, or valuation and timing methods adopted, by the LTC are then binding on the owners in respect of their look-through interests in the LTC’s property.
The amendment will apply from 1 April 2011.
Disposal of financial arrangements (Clause 35)
When an owner disposes of some or all of their interests, and those interests include a financial arrangement or an excepted financial arrangement, the owner is not required to perform a base price adjustment for their interest in a financial arrangement if, among other things, the LTC is not in the business of holding financial arrangements.
This amendment clarifies that is not necessary to consider whether any of the owners of the LTC have a business of holding financial arrangements in a capacity other than as an owner. It is only the LTC’s business that is relevant.
The amendment will apply from 1 April 2011.
Fringe benefits provided to working owners (Clause 88)
A shareholder of an LTC who personally and actively performs duties for the LTC under a contract of employment may, if certain conditions are met, be treated as an employee and be referred to as a “working owner”.
Fringe benefit tax (FBT) does not apply to fringe benefits received by working owners. Instead the cost of providing the benefit is a distribution of profit to that owner, to the extent of the private use element. The “private” costs are non-deductible to the other owners.
This amendment clarifies that a “working owner” is not treated as an employee for FBT purposes, by re-drafting the rule for “working owners” so that it is written in a similar style as the same, longer-standing, rule for “working partners” in a partnership.
The amendment will apply from 1 April 2011.
Flat-owning companies (Clause 88)
This amendment ensures that the definition of “flat-owning company” applies when that term is used in the definition of “look-through company”.
The amendment will apply from 1 April 2011.
Look-through “counted owner” test (Clause 88)
An LTC must have five or fewer “look-through counted owners”. The shareholdings of look-through owners who are relatives are aggregated, and they are treated as one look-through counted owner.
The definition of “relative” includes, among other things, a person connected with another person by being the trustee of a trust under which a relative has benefited or is eligible to benefit. This was not the intended policy outcome in relation to trustee owners of LTCs, who should be treated as separate look-through owners.
This amendment limits the meaning of “relative” for the purposes of aggregating interests in an LTC, by excluding a person connected with another person by being the trustee of a trust under which a relative has benefited or is eligible to benefit.
The amendment will apply from an LTC’s first income year starting on or after the date of enactment.
GST group registration rules (Clause 150)
An LTC is not generally regarded as a company for income tax purposes. However, for GST purposes, an LTC is a company and is the GST registered entity. The LTC is responsible for complying with any GST requirements, not each individual owner. Therefore LTCs should be able to use the GST group registration rules.
This amendment provides that the income tax rules for defining a “group of companies” will include an LTC to the extent that these rules are used to define a group of companies within the GST group registration rules only. This will allow LTCs to meet the requirements for GST group registration.
The amendment will apply from 1 April 2011.