A look-through company (LTC) is an ordinary New Zealand company that is ignored for income tax. The company's profits and losses are returned by its shareholders, in proportion to their shareholding, and the owners pay any tax themselves. The company still gives its owners limited liability, which means their personal assets are generally not at stake for the company's debts. It suits some small joint ventures and some loss-making ventures. It no longer suits most people who want to claim residential rental losses against a salary.
This guide explains what an LTC is, who can be one, how to elect, how the tax works, and what goes wrong when people lose the status without noticing.
What a look-through company is
When shareholders choose to become a look-through company, they agree to use the look-through company rules. Inland Revenue puts the effect plainly: if there is income tax to pay on the company's profit, the owners must pay it themselves.
The company is transparent for tax. Transparent means the tax system looks straight through the company to the people behind it. Tax profits or losses that the company would normally return are returned by the shareholders in proportion to their shareholding. If you own 60 percent of the shares, you return 60 percent of the profit or loss.
Outside tax, nothing changes. An LTC is just an ordinary company. From every other legal point of view you have a company with limited liability, run under the ordinary company legal framework.
The regime started on 1 April 2011. It replaced the earlier loss attributing qualifying company (LAQC) regime, which also let owners claim company losses personally.
Who can be an LTC
A company must meet all of these criteria.
- Five or fewer shareholders. Aggregation rules let certain related shareholders count as one, so the count is not always as simple as counting names. Ask your accountant how it applies to you.
- Shareholders who qualify. Every shareholder must be a natural person (a real human being), a trust, or another LTC. A standard company cannot be a shareholder of an LTC.
- New Zealand tax residence. The company cannot be a foreign company. It must be tax resident in New Zealand under New Zealand law, and it must stay resident after any double tax agreement is applied.
These criteria do not only matter on the day you elect. They apply every income year. We come back to what happens when a company stops meeting them.
How to elect
The election is made on Inland Revenue's Look-through company election form, the IR862. Everyone who owns a look-through interest in the company must sign it for the election to be valid. A trustee, director or agent with authority can sign. If an owner is under 18 or cannot legally sign, a guardian, a person holding power of attorney or a legal representative signs instead.
The form needs the company's name and IRD number, each owner's name and IRD number, and the income year from which the company will become an LTC. If the company is non-active, you must also complete the IR434 non-active company reactivation form.
The timing depends on the company.
| Situation | Deadline for the election form |
|---|---|
| New company, or a company that is only now starting to trade | On or before the date the company's first return is due, including any approved extension of time. You can complete it after the return is filed, if it reaches Inland Revenue by that date |
| Existing, trading company | Before the start of the income year the election applies for |
The second row catches people. An existing company cannot elect part-way through a year and look back. Plan it before the year starts.
If the form is completed properly and on time, and the criteria are met, Inland Revenue sends the company a letter confirming that it has become an LTC and from which date. Otherwise it sends a letter saying the election was not accepted. Keep the confirmation letter with your company records.
A company that was an LTC before
A company that has been an LTC and stopped cannot become one again in the year it stopped, or in either of the two following income years. If it stopped in the 2020 income year, for example, it could not re-elect for 2020, 2021 or 2022. Treat leaving an LTC as a decision with a three-year cost.
How income and losses are taxed
The mechanics are short.
- The company works out its income and expenses for the year.
- The result is split between the owners in proportion to their shareholdings.
- Each owner declares their share in their own income tax return and pays tax at their own rate.
In the first year of an existing company's election, Inland Revenue says each owner calculates and declares their part of the income in their own return.
This guide does not list tax rates. Rates change, and the right figure depends on your other income. Your accountant can run your numbers using Inland Revenue's current rates.
A worked example
This is an illustration with round numbers, not a quote from Inland Revenue.
Maria and Tom run a small design business through a company. Maria owns 60 percent of the shares and Tom owns 40 percent. Both are natural persons, the company is New Zealand resident, and there are two shareholders. The company is an LTC.
In a good year the company earns a profit of $100,000.
- Maria returns 60 percent: $60,000.
- Tom returns 40 percent: $40,000.
Each adds that amount to their own income and pays tax on it at their own rate. The company does not pay income tax on the profit.
In a bad year the business makes a loss of $50,000.
- Maria's share of the loss is $30,000.
- Tom's share is $20,000.
Because the loss passes to the owners, each can usually use it against their other income, subject to the loss rules that apply to them. That is the traditional attraction of an LTC for a new business that expects early losses. It is also why the next section matters.
Losses and rental property
The Government's concerns with the old LAQC regime were that losses were being claimed at personal tax rates, which historically could be as high as 39 percent, while profits stayed in the company and were taxed at 33 percent or 30 percent. There was also no cap on the losses an owner could claim, and debt-funded losses created no income if the debt was later written off.
Two things have changed the picture since then.
Residential rental property. Since 1 April 2019, losses from residential rental property cannot be offset against other forms of income. They can potentially be offset against future rental profits within the same portfolio. That removes the old pitch of claiming rental losses against a salary. For an investor in salaried employment, an LTC may no longer be the best option, and the choice needs a proper look at your own position.
Limits on how much loss you can claim. There are rules that limit a shareholder's claimable loss to what they have at risk in the company. Check with your accountant how they apply to you, particularly if your LTC is a partner with other LTCs.
Where an LTC can still make sense:
- holding loss-making investments other than residential property
- joint ventures between two and five business partners
- cross-border investment where an ordinary company could cause two layers of tax
What you give up
An LTC is not simply a company with better tax. These are the trade-offs.
Shareholder salaries. Because an LTC is ignored for tax, shareholders cannot draw shareholder salaries that are exempt from PAYE. There are restrictive rules on when a PAYE salary can be claimed. If you are used to the year-end salary approach that ordinary companies use, you cannot copy it here without advice.
Accumulated losses. When a company becomes an LTC, any loss balance from previous years is cancelled and cannot be carried forward. A company with $80,000 of losses from its early years loses all of them the moment it elects. Look at that number before you sign the form.
Old reserves. Owners can draw down or distribute an LTC's reserves without paying tax on the distribution. Inland Revenue says that treatment is not intended to apply to reserves the company accumulated before it became an LTC.
Share sales. Moving shares in an LTC is treated as moving the underlying property. Depending on what the company owns, that can produce a taxable gain, or depreciation recovery on depreciable property, subject to exemptions and minimum thresholds. If you plan to sell shares, take advice first.
Provisional tax. Because the owners pay tax on the profit, your own provisional tax, which is tax paid in instalments through the year, is the thing to plan for. How it applies to your situation depends on your circumstances. Our guide to tax pooling and provisional tax explains the mechanics.
If you take money from the company before the year is finalised, record it properly. See our guide to overdrawn shareholder current accounts.
When LTC status ends
There are two ways to lose LTC status. They behave very differently.
Automatic revocation
If an LTC stops meeting the criteria, its status is revoked automatically and it becomes an ordinary company. The shareholders do not need to do anything for that to happen.
The damage is the backdating. Inland Revenue says the change is backdated to the first day of the income year in which the company stopped meeting the criteria. The company's return for that year must be completed as an ordinary company, and it cannot pass any losses on to its shareholders.
Take the Maria and Tom example. Suppose Maria transfers her shares to a standard company part-way through the year. The shareholder rule is broken. The company becomes an ordinary company from the first day of that income year, not from the day of the transfer. If the company made a loss that year, the owners lose their ability to claim it personally.
Automatic revocations cannot be reversed. If it happens, the company or its tax agent should write to Inland Revenue saying what caused it and when. The company then cannot re-elect for that income year or for the next two.
The practical lesson is to check the criteria before any change in share ownership. Look at transfers, new shareholders, a trust deed that changes who the shareholder is, and the company's tax residence.
Choosing to end it
Any LTC owner can revoke LTC status using the IR896 form, a message through myIR (Inland Revenue's online service), or a letter. The company stops being an LTC from the start of an income year of the owner's choosing. The change cannot be backdated.
A voluntary revocation can be reversed, but only if the request is made in writing before the date the company stops being an LTC. Only the owner who made the original request, or owners who now hold all of that owner's look-through interests, can ask. The same bar on re-electing, for the year of exit and the next two, applies after a voluntary revocation.
Should you consider an LTC?
This table is a starting point for the conversation, not advice.
| Your situation | LTC worth considering? |
|---|---|
| Two to five partners running a business through a company | Often, if all owners qualify |
| A start-up that expects early losses and has owners with other income | Possibly, subject to the loss rules |
| Holding residential rental property while employed on a salary | The old reason no longer applies, so look at the alternatives |
| An existing company with large past losses | Be careful, because those losses are cancelled on election |
| An owner that is itself a standard company | No. That owner does not qualify |
| Owners who want a year-end shareholder salary | Not in the usual way |
If the numbers are close, the deciding factor is often the compliance side: every owner signs, every owner returns their share, and a change in ownership can undo the status.
Frequently Asked Questions
Does a look-through company pay income tax?
No. If there is income tax to pay on the company's profit, the owners pay it themselves, in proportion to their shareholding.
How many shareholders can an LTC have?
Five or fewer, though aggregation rules let certain related shareholders count as one. Every shareholder must be a natural person, a trust or another LTC.
Can an existing company become an LTC part-way through the year?
No. An existing, trading company must send the election form before the start of the income year the election applies for. Any losses from earlier years are cancelled when it becomes an LTC.
What happens if one of my shareholders stops qualifying?
The company's status is revoked automatically and backdated to the first day of that income year. It files that year as an ordinary company and cannot pass losses to its shareholders. This cannot be reversed.
Can I claim rental losses through an LTC against my salary?
Not for residential rental property. Since 1 April 2019, those losses cannot be offset against other income, though they can potentially be offset against future rental profits in the same portfolio.
Can I leave LTC status and come back later?
You can leave, but you cannot re-elect for the year you leave or the next two income years.