New Zealand’s look-through company regime: a tax practitioners’ perspective
Degree GrantorUniversity of Canterbury
Degree NameMaster of Commerce
This research explores look-through companies (LTCs) from the perspective of tax practitioners. Specifically, LTCs are compared with their predecessor, loss-attributing qualifying companies (LAQCs), in order to evaluate the efficacy of New Zealand’s closely held company regimes. Whilst Parliament may have had the intention of reducing compliance costs with amendments and changes to closely held company legislation (such as introducing LTCs), empirical evidence suggests that the opposite has occurred. Interviews with tax practitioners were used to gather evidence and thus draw conclusions on the overall effectiveness of the LTC regime. As well as this, documentary analysis was used to understand the policy rationale in enacting closely held company legislation. Findings were interpreted using a branch of institutional theory, historical institutionalism.
The findings indicated that a range of businesses use the LTC regime. Practitioners did not have a consensus on what the typical use of LTCs may look like, but indicated that LTCs were used for rental properties, companies anticipating losses, small family businesses and for international tax structuring and planning. Whilst Inland Revenue and Parliament contemplated the use of the LTC regime for small family businesses in enacting the regime, the other uses were not expected. In fact, most of the other uses are directly in conflict with the rationale for the regime: eliminating the role tax played in choice of entity, achieving closer integration between the company and its shareholders, and reducing complexity.
Based on their experience, practitioners were generally of the view that the LTC regime resulted in higher compliance costs, especially when compared to QC/LAQCs. Additionally, practitioners were also of the view that the LTC regime resulted in higher compliance costs when compared to traditional structures such as sole traders, partnerships and companies. These higher compliance costs arise due to LTCs being more complex than these other structures. Practitioners stated that this complexity was due to two reasons: the loss/deduction limitation rule (and owners-basis test) and poorly drafted legislation.
As previously mentioned, reducing complexity was an original aim of special closely held company regimes. However, when considering these findings, it appears the opposite has occurred. This complexity was one of the reasons that practitioners did not generally recommend the LTC regime to clients. However, if clients did use the LTC regime, it was almost always at the recommendation of practitioners. Clients tended to have very low levels of knowledge, and often knew more about LAQCs, which have been repealed for a number of years. Figures released under the Official Information Act indicated that LTCs have not been as popular as their predecessor, LAQCs. In the last year that LAQCs were in existence, there were 152,000 tax returns filed. This compares to 45,883 LTC returns being filed in 2016.
In regard to the rationale or motivation behind using LTCs, there was no consensus amongst practitioners. The most common reason for using the structure was the fiscal transparency that the structure provides. Some practitioners also viewed limited liability as being a reason for use. Other reasons for use included minimising double taxation, tax-free distributions to shareholders, and minimising tax on historic retained earnings. Another important reason for their use mentioned by practitioners was that LTCs were seen as a default replacement for LAQC/QCs and as such, many owners choose to transition into the LTC regime. However, this is also contrary to the policy rationale for the regime, reducing the role that taxation plays in the choice of entity structure.
Finally, practitioners were generally of the view that the most recent round of changes would decrease compliance costs for those that used the LTC regime. All practitioners were supportive of the removal of the loss/deduction rule, which, as previously mentioned, is a leading contributor to the regime’s complexity. However, a number of practitioners believed that other changes should have been made to the regime. These included expanding the five counted-owners restriction, and clarifying the transparency of the LTC regime.