Look Through Companies (LTC) - They are Getting Closer!

Last week we looked at the options to carry losses forward and in particular we focussed on LTCs and what defined effective an owner's interest. This week, we will continue our look at LTC's looking at the eligibility criteria, ownership rules, classes of shares and the tax status to become a look through Company.

Eligibility Criteria
For a company to be able to be a LTC, it must have the following criteria:

- Be a resident company in New Zealand.
- In terms of a double tax agreement, the Company can't be defined as a non resident taxpayer ie NZ company based in Australia.
- Has to have five or less owners - spouses are counted as one owner.
- Has only shares that are part of the look through interests.

Ownership Rules
Shareholders of a LTC are known as owners and can be either individuals or trusts
We introduce a new term here and that is "Look Through Counted Owner". This term only applies when determining the count test (number of shareholders) and should not be used as interchangeable with the term owner or shareholder.

The definition of an individual shareholder is extended to beyond spouses and encompasses individuals who are related by the second degree of blood relationship. So Mum, Dad, two daughters and two sons will all count as one Look Through Owner.

All Trustees of a shareholding Trust are counted as one Look Through Owner.

Classes of Shares
A LTC must have only one class of share and all shares must have the same rights to vote:
- regarding distribuions
- the company constitution
- capital variation
- director appointments
- to an equal right to receive distributions of profits and net assets

Most of our companies on our client list would comply with the LTC in relation to the class of shares.

Tax Status of a LTC
For a company to remain as part of the LTC regime one it has entered, it must meet all the eligibility criteria for the whole of any income year.

If a LTC breaches this eligibility, it's Look Through Company status is lost from the first day of the income year in which the breach occurs. So, if there is a breach in equality on 28 February 2012, then the LTC status will be revoked right back to 1 April 2011 and it will be precluded from entering the status for the next two income years.

Next week we look at a Loss Limitation example.