The Government is closing the loophole on loss attributing qualifying companies (LAQCs), a favoured property investment vehicle, by aligning the tax rates between the structures' deductions and profits.
Under the current rules, shareholders in LAQCs have been able to choose to deduct losses at their marginal tax rate then have the profits taxed at the lower company rate, effectively creating an arbitrage.
Finance Minister Bill English told Parliament that from April next year, the vehicles will be treated as limited partnerships, closing the loophole and ensuring "profits and losses are assessed at the marginal tax rate of the investor."
English said told a media conference before his budget speech that he changes are expected to a "reasonably significant amount of revenue," adding $190 million to the crown's coffers, and making up a smaller part of the government's changes to tax as it looks to widen its revenue base through an increase in GST and the removal of depreciation claims on property, while cutting corporate and personal rates.
The government expects it changes will whack professional property investors, who would be almost $15,000 worse off every year, rather than mum and dad property investors, who would be better off by an annual $1,200, according to government estimates. It didn't give an example as to how the tax package will impact on LAQC shareholders.
English told a media conference before his budget speech that if property investors have "two, three, four houses, they will be worse off."
Inland Revenue has been cracking down on LAQCs over the past year and the department reported the vehicles' claims against income had dropped over that period.
Though the government documents focused on shutting down the arbitrage, John Cantin, a tax partner at KPMG, said the changes should create greater simplicity for businesses when choosing investment vehicles.
"If it means all companies' tax gets the same treatment, it should be simpler," he said. "It may kill [LAQCs] off, but it's really saying it's time to pause for a breath" before jumping in, he said.