An LTC is transparent for income tax purposes in the sense that all of its income and expenses are considered to be derived or incurred directly by the shareholder and not by the company. In this sense, the company operates like a partnership, whereby the LTC will file a tax return for the purposes of calculating the shareholder's income, but will not be directly assessed for tax. This means that losses and profits will be deducted or taxed at the owner's marginal tax rate.
Remember, an LTC is tax fiction " an LTC retains its identity as a registered company and therefore is still governed by the Companies Act. In addition, an LTC is not transparent for other taxes such as GST or FBT.
In an LAQC, losses were attributed to shareholders in accordance with their shareholding interest in the company. Under the LTC rules, a shareholder will derive a loss, but will be restricted to offsetting that loss against other income if the shareholder does not have a sufficient ownership basis in the company. If the shareholder is unable to use their loss, or part of their loss, the loss is carried forward until they meet the eligibility requirements for utilising the loss. In some cases, determining a shareholder's ownership basis will give rise to a significant increase in compliance costs.
The other major differences between the two regimes are first that a shareholding change will not require the company to re-elect to be an LTC. Secondly, unlike a QC, the sale of shares in an LTC triggers a deemed disposal of the underlying assets of the company. Thirdly, a company's status as an LTC is only revoked by a revocation notice or by the company ceasing to meet the eligibility criteria (such as the number of shareholders). This could create some issues for the shareholders, in that whilst all shareholders must elect for the company to become an LTC, it only takes one shareholder to revoke that election.
A QC can declare and pay a shareholder salary, however an LTC cannot. For a salary to be paid to a working shareholder, an employment contract must be in place and regular payments made with PAYE deducted.
The LTC rules are detailed and careful consideration as always is required to determine what the best option for you business structure.