Look Through Company (LTC)

Key Features

The LTC retains its identity as an incorporated company, and will keep its corporate obligations and benefits under general company law, such as limited liability.

For income tax purposes, the LTC is "looked-through" and the owners of an LTC are regarded as holding the LTC's assets directly and carrying on the activities of the LTC personally.

Tax

An LTC's income, expenses, tax credits, gains and losses are passed onto its owners, in accordance to their effective interest in the company.

Each owner of the LTC will then record any income or losses, as appropriate, in their own income tax return.

For other tax purposes (such as GST, PAYE or FBT) the LTC retains its tax obligations.

LTC income return

The LTC must complete an Income tax return (IR 7) that includes the total amount of income or deductions for the company for the income year, the amount of income for each owner, and a summary of the deductions for each owner. The company isn’t taxed, but each owner must make a separate income return taking into account the amounts shown on the company’s income return. An exemption from this obligation mat be sought by a non-NZ resident not subject to NZ tax.

To become an LTC a company must meet the following criteria:

It must be a New Zealand tax resident company. The residence of the company, not its shareholders, determines a company's residence.

All the company's shares can only be owned by individuals, trustees or another LTC. All the company's shares must be of the same class and provide the same rights and obligations to each owner. Although no owned by an ordinary company an NTC may be the shareholder of an ordinary company.

The LTC must have five or fewer "look-through counted owners" who ultimately will receive any income or loss from the LTC. Related owners within two degrees of relationship can be counted as a single look-through counted owner. There are special rules for determining who counts as a look-through counted owner when shares are held by a trustee. This is explained in more detail in the Look-through companies (IR879) guide

The look-through counted owner test must be applied if a trustee holds shares in an LTC. Here the test will “look through” to the natural person beneficiaries of the trust (which includes looking through any corporate beneficiaries to its natural person shareholders), if those beneficiaries are allocated income from the LTC as beneficiary income in that income year, or in any of the three preceding income years.

The trustees of a trust are counted as one look-through counted owner for an income year if any income the trust was allocated from the LTC in that income year, and in each of the preceding three income years, was retained by the trust and not paid out as beneficiary income.

If a company is the beneficiary of a trust and has received income from the LTC as beneficiary income in that income year, or in any of the three preceding income years, the company itself isn’t seen as a look-through counted owner. Instead, every natural person who has a voting interest in relation to that company is counted as a separate look-through counted owner.

The shareholders of a company can elect for the company to be an LTC by completing a Look-through company election form (IR862)

All the LTC's shareholders must sign the election form.

A guardian or legal representative must sign for owners aged under 18, or who are not legally able to sign the election.

A company director, or an agent authorised by a director, needs to complete the director's notice on the IR862. This confirms that all owners have signed the election and that the company meets the eligibility to be an LTC.

Income & Losses

The income of an LTC is taxed, and expenses are deducted, as if each owner has received that income and incurred the expenses personally in proportion to their effective interest in the LTC.

Any profit is taxed at the owner's marginal tax rate, while the owner can offset any losses against their other income, subject to a loss limitation rule.

The loss limitation rule is similar to that for limited partnerships. Owners can offset tax losses only to the extent the losses reflect their economic loss. Any loss that cannot be used is carried forward and may be claimed in future years, subject to the application of the loss limitation rule in those years.

The LTC will file an updated IR7 return showing the attribution of income and losses to the LTC's owners and each owner will then record their income or loss from the LTC in their own return.

Practice

As a trustee may act as shareholder, a New Zealand private trustee company operated by trustee.net.nz may act as sole shareholder with the LTC’s share held for the beneficiaries named in the deed of New Zealand Foreign Trust. Alternatively up to 5 individuals may be its shareholders. If a company is named as the beneficiary of a trust, the LTC will look through to the individual shareholders of the corporate beneficiary.

An LTC (treated for tax as a partnership) held by a trustee of an NZ foreign Trust is not taxable in NZ due to the place of residence of the settlor of the trust of which its shareholder is trustee. It’s not taxable in NZ on foreign sourced non-trading income. Trading income of an NZ Foreign Trust may be taxable in NZ as the trade may be treated as having its source in NZ. An LTC with an NZ Foreign Trust would generally only be useful to receive “passive” income. Investment decisions of the LTC made in NZ could cause investment business income to have an NZ source particularly if the level of investment activity were such that it coiuld be construed as an investment business.

trustee.net.nz is able to supply registered office, directors and trustee shareholder. An NZ Foreign Trust is a trust settled by a non-NZ resident settlor irrespective of the place of residence of the trustee. An NZ Foreign Trust which does not trade in NZ and has its income outside NZ is treated not taxable in NZ.

See: schedule of fees