The main types of business structures for owning and operating a business activity in New Zealand are;
Sole trader (direct investment)
This refers to a person carrying on business by themselves under their own name or under an unregistered trading name. All profits generated are taxed in the hands of the person who owns the business. There is no legal separation between the person and their business, therefore the owner is personally liable for all debts of their business.
A partnership is an unincorporated body of persons that carry on business under their own names or under an unregistered trading name with a view to producing a collective gain. Profits derived by a partnership are divided amongst the partners and each partner is separately assessed for tax on his/her share. There is no legal separation between the partners and their business and all partners are joint and severally liable for the debts of the partnership.
From April 2008 special partnerships can no longer be formed, however those special partnerships that are in existence can continue until the end of their seven year term. After that the special partnership must end and convert to a Limited Partnership.
The Special Partnerships regime has now been replaced by Limited Partnerships. From 2008 Limited Partnerships must be registered with the Registrar of Companies. Limited Partnerships comprise a general partner who manages the business and one or more limited partners. Provided limited partners do not involve themselves in the management of the partnership their liability is limited to the capital they contribute. Profits and losses of Limited Partnerships flow through to the partners in proportion to their share in the partnership and are taxed at the partner level, not the partnership level.
A Joint Venture is a relationship between two or more parties that is formed for a particular commercial transaction or transactions, which is carried on in common but with a view for each party to produce an individual gain. Generally, the parties to a joint venture will each take a share of the profits derived from the common undertaking and each party will declare its net share in its own tax return and be separately assessed for tax. Each party is likely to be legally responsible for its own debts (i.e. no joint liability).
A company is an incorporated body of persons that carries on business under the name of the company or its trading name with a view for the company to derive a gain. The profits derived by a company are taxable in the hands of that company. Tax paid profits can be distributed as taxable dividends to shareholders, however the imputation tax rules can reduce the effect of double taxation. A company is regarded as a separate legal entity from its owners and therefore provides limited liability to them to the extent of the capital they contribute.
Qualifying company / LAQC
Currently a qualifying company (QC) is an ordinary company except that it has been granted Qualifying Company status by Inland Revenue. Therefore, a QC has all the same commercial law traits as an ordinary company. The 2010 Budget process included a complete review of the QC and LAQC regime with significant changes set out for these entities in the near future.
From the 2011/12 year QCs and LAQCs will be taxed as limited partnerships with the income and losses flowing through to shareholders in proportion to their "effective interest" (generally a shareholder's voting interest). The distinction between the two will be removed and only QCs will continue to exist with only one class of share allowed. Consequently, while losses will still flow go to individuals, income will also taxed at personal tax rates.
A change in shareholding will give rise to a deemed disposal and acquisition which will prevent companies using shareholders on high marginal tax rates while making losses and changing shareholding to use shareholders with low marginal tax rates when they become profitable. Losses are therefore ring-fenced to extent of capital introduced.
The result of these changes will mean that for many the benefits of using the QC / LAQC regime will be negated and an alternative structure may need to be implemented.
Look Through Companies (LTC)
An LTC must be a resident in New Zealand, It must have five or fewer look-through counted owners. Only a natural person, trustee or another LTC can hold shares in an LTC. All the company’s shares must be of the same class and provide the same rights and obligations to each shareholder.
All owners must elect for the company to become an LTC. Once a company becomes an LTC it will remain so unless one of the owners decides to revoke the LTC election, or it ceases to be eligible to be an LTC.
Generally, an LTC’s income, expenses, tax credits, gains and losses are passed on to its owners, these are allocated to owners in proportion to the number of shares they have in the LTC
Any profit is taxed at the owner’s marginal tax rate. The owner can use any losses against their other income
There are loss limitation rules, these ensures that losses claimed reflect the owner’s economic loss in the LTC.
The owners of an LTC are treated as holding the LTC’s property directly in proportion to their shareholding. When owners sell their shares they are treated as disposing of their share in this property and may have to pay any tax associated with this, if certain thresholds are exceeded. If the company is liquidated or ceases to be an LTC but otherwise continues in business, the owners are considered to have disposed of their shares at market value.
Look-through applies for income tax purposes only. Under company law an LTC retains its corporate obligations and benefits, such as limited liability.
A trust is an unregistered entity set up by one or more persons (the settlor's), but for the benefit of other (the beneficiaries). A third group of persons (trustees) control the assets of the trust. A trust is not a separate legal entity from its trustees. Therefore, trustees are personally liable for the debts of a trust unless some exemption is provided (common for professional trustees & bank loans). The income of a trust is taxable either in the hands of the trustees or as beneficiary income.
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TAX DATES TO REMEMBER
20th July 2012 - monthly employers PAYE payment...
28th July 2012 - Payment for May/June 2012 GST Return..
Posted on Sun, 1 July 2012
by Shawn O'Grady