IR 435 April Qualifying companies. A guide to qualifying company tax law

Transcription

1 IR 435 April 2011 Qualifying companies A guide to qualifying company tax law

2 Go to our website for information, services and tools. Secure online services login to check your account information, file an employer schedule, confirm personal tax summaries and update your family details and income. Get it done online complete and send us forms and returns, make payments, make an appointment to see us and give us feedback. Work it out use our calculators, worksheets and tools to help you manage your tax business like checking your tax code, or your filing and payment dates. Forms and guides download our guides, and print forms to post to us. You can also check out our newsletters and bulletins, and have your say on items for public consultation. How to get our forms and guides You can view copies of all our forms and guides mentioned in this guide by going to and selecting Forms and guides. You can also request copies by calling The information in this guide is based on current tax laws at the time of printing.

3 QUALIFYING COMPANIES 1 Introduction This guide contains information relating to qualifying companies (QC) and loss attributing qualifying companies (LAQC). We ve provided a list on page 55 for terms that you may not be familiar with, or that are used differently from their everyday meaning. The Income Tax Act 1994 applies to income derived in the and prior tax years. The Income Tax Act 2004 applies to income derived in the , and tax years. The Income Tax Act 2007 applies to income derived in the and subsequent tax years. For legislation specific to qualifying companies (QC) and loss attributing qualifying companies (LAQC) please refer to subpart HA of the Income Tax Act Unless otherwise noted all references are to the Income Tax Act QC and LAQC changes Legislation enacted in December 2010 made changes to the rules for QCs and LAQCs. A new look-through tax entity, the look-through company (LTC) was also introduced. The changes mean: companies will not be able to elect to become QCs or LAQCs for income years starting on or after 1 April LAQCs will no longer be able to attribute losses to shareholders for income years starting on or after 1 April QCs will be able to continue using the QC rules, without the ability to attribute losses as an LAQC. All LAQCs will effectively become QCs at the start of their income year that starts on or after 1 April existing QCs and LAQCs will be able to transition into the new LTC rules or change to another business vehicle such as a partnership, without a tax cost, during either the first or second income year starting on or after 1 April The new rules come into effect at the start of the first income year starting on or after 1 April For a QC or LAQC with a standard balance date (ie, 31 March) the new rules will apply for the income year. The income year will be the final income year in which an LAQC can attribute losses to its shareholders.

4 2 For information about QCs and LAQCs intending to remain a QC, or intending to transition into another business structure, see Part 11. For information about LTCs, including how a QC or LAQC can transition into the new entity at no tax cost, read our Look-through companies (IR 879) guide.

5 QUALIFYING COMPANIES 3 Contents Introduction 1 QC and LAQC changes 1 LAQCs and residential properties 6 Living temporarily in a property owned by your LAQC 7 Part 1 What are qualifying companies and loss attributing qualifying companies 8 Qualifying company (QC) 8 Advantages of being a QC 8 Disadvantages of being a QC 8 Differences between a QC and a company for tax purposes 9 Loss attributing qualifying company (LAQC) 11 Part 2 Who can be a QC or an LAQC 12 Requirements of a QC 12 Requirements of an LAQC 13 Shareholder count test 14 Part 3 How to become a QC or an LAQC 18 No elections for income years starting on or after 1 April QC or LAQC elections 18 When are the elections due? 18 What happens if my election is filed late? 19 Non-standard balance dates 20 How to complete elections 21 How is a majority shareholder election made? 21 Confirmation of QC and/or LAQC status 25 Shareholder liability 25 Shareholders effective interest 26 Market value interest 27 Rules to determine effective interest 27 Part 4 How to maintain QC or LAQC status 28 Re-elections due to changes in shareholding 28 When are re-elections due? 29 How to complete re-elections 30

6 4 Part 5 How QC or LAQC status is revoked 31 Ceasing to be a QC or LAQC 31 Voluntary revocation 31 Automatic revocation 32 What do I do if QC or LAQC status is revoked automatically? 33 Revocations and effective interest 33 Liquidating or winding up a QC or LAQC 34 Part 6 Who is liable for qualifying company election tax (QCET) 35 Calculating QCET 35 Assessment and payment 36 Penalties 36 Effect of revoking the QC election 37 Part 7 Distributing dividends as a QC or LAQC 38 Dividend imputation system 38 Resident and non-resident shareholders 39 Summary of tax treatment for different types of distributions 39 How imputation credits are attached to dividends 39 Amount of dividend that will be taxable 40 FDP (foreign dividend payment) 41 Reduction of company tax rate and imputation credits 41 Part 8 Imputation credit account (ICA) 42 ICA rules that apply to qualifying companies 42 Debit balances 43 Part 9 Taxing a QC or an LAQC 44 Intercompany dividend exemption 44 Subvention payments and loss offsets for a QC and LAQC 44 FBT (fringe benefit tax) 45

7 QUALIFYING COMPANIES 5 Part 10 Taxing shareholders of a QC or LAQC 46 Dividends received from a QC 46 Exempt dividends distributed to beneficiaries 46 Deductible interest on money borrowed to purchase shares 46 Attributing LAQC losses to shareholders 47 How to apportion LAQC losses with shareholding changes 47 Non-resident shareholders in an LAQC 48 LAQC and treatment of foreign losses 49 Deduction for attributed loss 49 Part 11 Qualifying companies changes 50 What s changing? 50 How will this affect existing companies? 50 How can a company transition? 51 How to make the transition 51 Transitioning to an LTC 52 Remaining a QC 52 Revoke QC status 52 Transition into a partnership or limited partnership 52 Transition into a sole trader 53 Losses carried forward 53 Completing the transitional process 54 Terms we use 55 Services you may need self-service numbers 59 Need to talk to us? 59 Customer service quality monitoring 59 Privacy 60 If you have a complaint about our service 60

8 6 LAQCs and residential properties If you re thinking about using an LAQC for residential property for the income year or earlier, you need to know about the possible tax consequences of doing this. The expenses of living in the family home are normally treated as private expenditure and aren t tax deductible. Problems arise when owners live in a home owned by their LAQC and claim deductions (eg, interest, insurance, rates and maintenance) for the property. The structuring and claiming of any resulting losses may be seen as tax avoidance. You may believe that if you continue to pay market rent to the company you can keep claiming these LAQC losses against your income. But, we may still see this arrangement as tax avoidance. The same principle applies if you use a similar structure such as a company, partnership or trust. Tax avoidance carries penalties of up to 100% of the tax shortfall.

9 QUALIFYING COMPANIES 7 Living temporarily in a property owned by your LAQC From time to time an owner will move into a home owned by their LAQC which was previously rented, because, for example: they can t find tenants a relationship breaks down they form a relationship with tenants they re renovating or building their own home. But, if you live in the property and you re an owner, you generally can t continue to claim what would otherwise be private expenses. Get advice before you act Anyone considering moving into their LAQC owned property or setting up an LAQC for the purpose of owning their family/private home for tax loss claim purposes should talk to a tax advisor and/or us before making any decisions. Generally, we d consider any arrangements like the one described above to be tax avoidance and we d disallow any deductions claimed by the LAQC s owners relating to the family home. Penalties could also apply.

10 8 Part 1 What are qualifying companies and loss attributing qualifying companies Qualifying company (QC) QCs are companies governed by tax provisions that aim to treat the company and its shareholders as one entity as much as possible for income tax purposes. A QC pays income tax on its profits in the same way as other companies (subject to certain rules as outlined in Part 9). However, there are some differences that result in advantages and disadvantages to becoming a QC as outlined below. Advantages of being a QC There are commercial benefits in maintaining a company structure with the taxation benefits of a partnership (eg, limited liability and the ability to transfer ownership). Only dividends with imputation credits attached are taxable to the shareholders. Capital gains (realised and unrealised) can be distributed tax free without winding up the company. Disadvantages of being a QC Shareholders are liable for any unpaid income tax for the company according to their effective interest. Some companies will be liable to pay qualifying company election tax (QCET). Company losses incurred prior to becoming a QC are forfeited. If a QC is in a profit situation it can only make a subvention payment to another group company if it is also a QC. Also, a QC in a profit situation can also only receive a loss offset from another group company if it is a QC. Interest shareholders have paid to acquire shares isn t fully deductible. For a more detailed comparison of the differences between a QC and a company for tax purposes, please refer to the following table.

11 QUALIFYING COMPANIES 9 Differences between a QC and a company for tax purposes QC Requirements that must be met Investment restrictions Shareholding Tax liability Foreign company Distributions Dividends Shareholderemployee salaries Derive a maximum of NZ$10,000 foreign-sourced non-dividend income per year. It mustn t have, at any time, any income interest in a controlled foreign company or an attributing interest in a foreign investment fund that is a direct income interest of 10% or more. Limited to five (subject to shareholder count test) A shareholder that is a company must be a QC Change in shareholding may require re-elections and could result in a deemed revocation of QC status Shareholders liable for unpaid income tax Can t be a qualifying company Imputation credits fully attached or exempt Deductible to the company and assessable to the shareholder-employees Company None None None (except section HD 15) Can be a New Zealand resident company Taxable Deductible to the company and assessable to the shareholder-employees

12 10 QC Company Capital dividends Exempt from income tax Tax free on winding up only Dividends to non-residents Imputation credits received NRWT must be deducted and paid on all dividends Credit to imputation credit account (ICA) and offset against tax liability Share repurchases Excess classed as ordinary dividend to shareholder Income or losses Losses Fringe benefits To shareholders To shareholderemployees Other Interest paid to acquire shares A QC in profit can only receive a loss offset from another group company if it is also a QC. A QC in profit can only make a subvention payment to another group company if it is also a QC. An LAQC can t make loss offsets to other companies. Losses must be fully attributed to shareholders Non-deductible and nonassessable Deductible by company, nonassessable to shareholderemployees, but subject to FBT Apportionment required NRWT must be deducted and paid on all dividends Credit to ICA and offset against tax liability Excess liable for FBT unless shareholder elects to be assessed General rules apply Non-deductible and nonassessable Deductible by company, nonassessable to shareholderemployees, but subject to FBT Deductible

13 QUALIFYING COMPANIES 11 ICA Credits carried forward QC 66% rule only applicable if qualifying company status is forfeited Company 66% rule Loss attributing qualifying company (LAQC) An LAQC is a specific type of QC with additional features and requirements. For income years up to the income year starting on or after 1 April 2011 an LAQC must fully attribute its net losses incurred for each tax year to its shareholders, in the same proportion as their effective interest. For income years starting on or after 1 April 2011 LAQCs will no longer be able to attribute losses to their shareholders, and will automatically become a QC. For LAQCs with a standard balance date (ie, 31 March) the last income year it will be able to attribute losses to its shareholders will be the income year. From the start of the income year it becomes a QC without the ability to attribute losses. For more information about this, and options available for QCs and LAQCs to transition into another tax entity, see Part 11. For income years where it is able to attribute losses the shareholders of the LAQC can offset the company s losses according to their effective interest against their own taxable income within their individual tax returns. This also means that an LAQC in a profit situation doesn t have the benefit of prior year losses to bring forward because once attributed to shareholders they are no longer available to the company. Because an LAQC must fully attribute its losses to the shareholders each year they are incurred, this means that an LAQC in a loss situation isn t able to: make a loss offset receive a subvention payment carry losses forward within the company. An exception to the latter is where a QC in a loss situation becomes an LAQC. In this scenario, the loss that was available as a QC immediately prior to becoming an LAQC is not forfeited. It can t however be attributed to the shareholders because it was incurred before the company was an LAQC. The loss must be carried forward within the company until it is in a profit situation and able to use it.

14 12 Part 2 Who can be a QC or an LAQC Requirements of a QC To be a QC, all the following requirements must be met for the whole of the income year. The company must not be a foreign company at any time during the year. However, a company that has non-resident shareholders will not necessarily be excluded from becoming a QC. The company mustn t have, at any time any income interest in a controlled foreign company or an attributing interest in a foreign investment fund that is a direct income interest of 10% or more. The company must not be a unit trust. The company must not receive more than NZ$10,000 in foreign-sourced non-dividend income per year. To determine the $10,000 limit, a deduction is made for the lesser of: gross foreign non-dividend income (accrual income) 10% of the company s annual gross income before any deductions. Please note, it is necessary to consider where the income is sourced to determine when the $10,000 limit applies. Each shareholder must be: a person, a QC or a trustee of a specified kind. If a shareholder in a QC is a trustee: every beneficiary of the trust which received dividends from a QC must be either a person or a QC. the trustees must distribute dividend income (including cash and taxable bonus issues) derived from a QC during the income year to beneficiaries as beneficiary income. Normal trust rules apply in that the income must be paid or applied within six months of balance date. These rules are relaxed when the trust pays or vests as much of the dividend income as is allowed under general trust law.

15 QUALIFYING COMPANIES 13 The number of shareholders in the company must not exceed five, unless it is purely a flat-owning company see page 55). There are special rules for determining the number of shareholders for QC purposes see Shareholder count test on page 14. Valid elections must be filed with us within a specified timeframe see Part 3. Valid elections must be in place for the whole of the income year to maintain QC status. Re-elections must be completed by new shareholders when the shareholding changes and filed with us within the grace period see Part 4. QC status must not be revoked, whether through a voluntary revocation or an automatic revocation see Part 5. Please note that when a company loses its LAQC status it also automatically loses QC status. Requirements of an LAQC To be an LAQC*, a company must meet all the requirements of being a QC as well as additional requirements for the whole of the income year, as follows: An LAQC must have only one class of shares. All the shares must have the same rights to vote concerning company distributions, company constitution, capital variation and director appointments, and to receive distributions of profits and net assets. Section FA 2 debentures are considered to be shares and must also satisfy these requirements. A QC with such debentures on issue is unlikely to meet the requirements to be an LAQC. There must be no share in the company that was subject to an arrangement to defeat the intent and application of the LAQC rules. For a company to become a QC (or LAQC) a Qualifying company or loss attributing qualifying company election (IR 436) form must be completed by all directors and shareholders who can legally sign the election. All shareholders also elect to become personally liable for their share of any unpaid income tax for the company, according to their effective interest. * No company can be an LAQC for an income year starting on or after 1 April See Part 11 for more information

16 14 Shareholder count test Shareholder count test for individual shareholders The maximum number of shareholders for a QC (and an LAQC for income years up to the income year starting on or after 1 April 2011) is five. For some companies, it will be obvious that they meet this requirement without needing the shareholder count test. For example, a company that has three individual shareholders clearly has fewer than five shareholders. However, for companies that have more than five individual shareholders, or that include non-individual shareholders (ie, a company or a trust shareholder) the shareholder count test needs to be considered. The shareholder count test determines the number of shareholders a company has for QC purposes through identifying the relationships between individual shareholders and applying the look-through test for non-individual shareholders. Shareholders related by blood relationship, marriage, civil union or de facto relationship, or adoption, are seen as being related within one degree and are counted as as a single shareholder for QC purposes. To clarify the degrees of separation in a relationship between individual shareholders, think of a family tree. Count the steps back to a common ancestor and then forward to the other person. Each link is a one-degree relationship. Shareholder relationships with two degrees of separation between them are still counted as two separate shareholders for QC purposes. Parent Son Daughter In the example above, if all three are shareholders in a company, they are counted as a single shareholder because the son and daughter are related to the parent within one degree. But, if the parent was not a shareholder, the brother and sister would count as two shareholders because they are related within two degrees. The relationship between a step-parent and step-child is a second-degree relationship for QC purposes.

17 QUALIFYING COMPANIES 15 Shareholder count test for company shareholders Only companies that are also QCs may hold shares in a QC (except when they are acting as a nominee). In determining whether there are five or fewer shareholders, the company is not counted as a single shareholder. Instead, you must look through to its individual shareholders and identify the relationships between them to determine the shareholder count (see the company shareholders example below). Shareholder count test for trust shareholders If a trust is a shareholder it is necessary to look through to the beneficiaries of the trust. It is the beneficiaries who are counted to determine the shareholder count for a trust. The number of beneficiaries will be the greater of: the number of beneficiaries who have received dividends from the trust in that income year where all the dividends were derived from a QC, or the number of beneficiaries who elected that the company become a QC. Note In most circumstances, trusts, as shareholders of a QC, are required to pass out dividends to beneficiaries. Shareholder count test for nominee shareholders Shares held on behalf of a person are deemed to be held by that person. If a nominee shareholder is a trust or another company rather than a person, this alone will not prevent a company from becoming a QC. Special rules for shareholder count test Death or dissolution of marriage or civil union of the shareholders doesn t break the one-degree test, provided the company was a QC and the shareholders were considered to be one before the event. Holders of debentures to which section FA 2 applies are treated as shareholders. Examples that meet the shareholder count test Company shareholders Company C Ltd has the following shareholding: 50% Company D Ltd 34% Luke 33% Harry brothers 3 33% Ben

18 % Company E Ltd 25% Peter 25% Mary 25% Sam 25% Susan husband and wife 1 husband and wife 1 In this example, Company C Ltd has five shareholders for the purposes of the shareholder count test. The three brothers of Company D Ltd are related within two degrees so they are counted individually. Since a husband and wife are related within one degree, Company E Ltd has two shareholders. If the shareholders of Company E Ltd were not related to each other, the shareholder count for Company E Ltd would be four. Overall, this would result in a shareholder count of 7 for Company C Ltd and it would not be eligible to become a QC. Trust shareholders Company B Ltd was incorporated on 1 April 2009 with the following shareholding: 10% Jack 90% family trust trustee Jack beneficiaries Sandra (Jack s wife) Matt Neve Jack and Sandra s Oliver children Piers Jack signs the shareholder s elections for Company B Ltd as the individual shareholder and as the sole trustee for the trust shareholder. Sandra signs the shareholder s elections for Company B Ltd as the beneficiary who can legally sign the election for the trust. Assuming five beneficiaries have received QC dividends through the trust, the company s shareholding, including Jack, totals six. However, since these shareholders are all related within one degree, the company has only one shareholder for the shareholder count test.

19 QUALIFYING COMPANIES 17 Mixed shareholding Company A Ltd was incorporated on 1 April 2009 with the following shareholding: 40 % Bob 10 % Sue (Bob s wife) 1 13 % Phil (Bob s son, aged 21) 13 % Stephen (Sue s brother) 13 % Jamie (Stephen s son) 1 6 % family trust trustee Bob beneficiaries Sue Phil Jamie 5 % Company F Ltd 99% Bob 1% Denise (nominee for Bob) In this example, Company A Ltd has two shareholders for the purpose of the shareholder count test: 1. Bob, plus Sue, Phil (one degree from Bob) and Denise (nominee) 2. Stephen, plus Jamie (one degree from each other). You may need to apply the test more than once, starting with different shareholders, to arrive at the least number of shareholders. Note If it isn t clear whether a company has five or fewer shareholders, supply details of shareholder relationships with the elections.

20 18 Part 3 How to become a QC or an LAQC No elections for income years starting on or after 1 April 2011 Elections to become a QC or LAQC won t be able to be made for any income years starting on or after 1 April If the first income year a company would be able to become a QC or LAQC would begin on or after that it won t be able to use the QC or LAQC tax rules. For a company with a standard balance date (ie, 31 March) the last year an election to become a QC or LAQC can take effect is the income year. QC or LAQC elections A company can only become a QC or an LAQC when it meets all the eligibility requirements (see Part 2) and it files a valid Qualifying company or loss attributing qualifying company elections (IR 436) form with us. All directors and shareholders who can legally sign the election must complete the IR 436 and file it with us no later than the due date. By signing the elections, the directors (Section 1 Directors election) and shareholders (Section 2 Shareholder s election) elect the company to become a QC or an LAQC. The shareholders also elect to become liable for any of the company s unpaid income tax according to their effective interest. When are the elections due? New companies For a company to become a QC or an LAQC from its incorporation date, unless it was incorporated in an income year starting on or after 1 April 2011, valid elections must be filed no later than the due date for the first income tax return for the company. The due date for a company s income tax return and elections is 7 July, unless it has an extension of time. If a company is linked to an accountant who is registered as a tax agent with us, an extension of time may be approved to file the company s income tax return and elections by 31 March of the following year. Please note there is no discretion within the legislation for us to allow elections filed late to be retrospectively applied.

21 QUALIFYING COMPANIES 19 What happens if my election is filed late? Example Little Boy Blue Ltd is incorporated on 24 January 2011 and has a 31 March balance date. It commences trading within its first year, and doesn t have an extension of time to file the income tax return. In order to become a QC or an LAQC effective from its incorporation date, valid elections must be filed with us by 7 July Valid elections are not filed with us by 7 July, so Little Boy Blue Ltd is now too late to become a QC from its incorporation date. As elections to become a QC are not possible for income years starting on or after 1 April 2011, Little Boy Blue Ltd will not be able to become a QC. Several tax implications result from Little Boy Blue Ltd filing late QC or LAQC elections. For example, it won t be able to attribute any losses to shareholders. These losses can only be carried forward within the company. Consequently, the shareholders of Little Boy Blue Ltd can t claim any LAQC losses from the company. Further, as Little Boy Blue did not elect to be a QC or LAQC for the income year prior to the income year starting on or after 1 April 2011, they won t be able to take advantage of any of the transitional provisions explained in Part 11. If Little Boy Blue did decide to elect to become a look-through company (LTC) or change into another business structure, full tax costs would be incurred for any election or company restructure. Shelf companies Some companies may incorporate but not start trading within their first income year. The due date for these companies usually referred to as shelf companies to file elections is the same as when their first active income tax return is due. Non-active company declaration and reactivation forms should also be filed for shelf companies to confirm the tax years they were non-active and then the year they started trading. Shelf companies will not be able to elect to become a QC or an LAQC if they begin trading in an income year that starts on or after 1 April 2011.

22 20 Existing companies For companies that have previously traded (and didn t file elections by the due date for their first active income tax return) the entry date into the QC rules would ve been the start of the income year following the date they file the elections. However, as elections to become a QC or LAQC can t be made for income years starting on or after 1 April 2011, existing companies are no longer able to elect to use the rules. Non-standard balance dates Elections relate to the income year of the company electing to be a QC or an LAQC. So, the due date for an election for an existing company depends on its balance date. For example, elections for a company with a 30 June balance date wanting to become a QC from the 2011 income year, are due on or before 30 June Note Company income tax returns can be filed electronically or online but you can t submit elections this way they must be posted or faxed. We ll allow six days for postage of elections for companies that have: an approved extension of time to 31 March filed the company income tax return electronically or online and completed and posted the elections before or on 31 March. Please note that there is no allowance for faxed elections. We don t recommend you faxing elections close to the 31 March deadline because of the risk of them not being transmitted, due to heavy demand.

23 QUALIFYING COMPANIES 21 How to complete elections It s important that elections are completed correctly especially when submitted close to the due date because there is no grace period for invalid elections. Generally, for an election to be valid, all directors and all shareholders who can legally sign the election must elect by signing Section 1 Directors election or Section 2 Shareholders election respectively. Acceptable exceptions to this include where a: volunteer (eg, a trustee) has elected on behalf of a beneficiary of a trust shareholder who can t legally sign the election majority shareholder election has been made on behalf of a minority shareholder person holding power of attorney with a copy of this attached to elections has signed for a director and/or a shareholder nominee shareholder or bare trustee has elected on behalf of a shareholder. Note Please keep a copy of the original elections (and re-elections) filed with us and a fax/mail log for your records. This will enable you to provide evidence if we ask for it that the elections were filed by the due date. How is a majority shareholder election made? A majority shareholder is a shareholder or group of shareholders that has an effective interest (individually or combined) of 50% or greater. A minority shareholder is a shareholder who has an effective interest of less than 50%. Majority shareholders can elect on behalf of minority shareholders to become liable for the minority shareholder s liability for any unpaid income tax for the company as well as for their own liability. For more help in completing elections correctly see the example on pages and the IR 436 checklist on page 24. Note A tax agent employed to advise or prepare tax returns and a solicitor employed to set up a company can t sign elections on behalf of a director or a shareholder.

24 22 Qualifying company or loss attributing qualifying company elections IR 436 April 2011 For help completing this form please read the notes on the back. This form is to elect to be either: (tick one) a qualifying company a loss attributing qualifying company both Is this a re-election due to a change in shareholding? Yes State the date of change No Day Month Year Section 1 Directors election To be completed by all directors (see note 4) of the company. If there are more than seven directors, complete another election form and attach it to this. I/we elect that Name of company IRD number (8 digit numbers start in the second box. ) Contact person s name Contact number ( ) ext Daytime shall become a qualifying company/loss attributing qualifying company (delete one if applicable) from onwards (see note 2). Director s name Director s name Seven Dwarfs Limited Mr Happy Day Month Year Mr Happy Signature M.R. Happy Mr Sneezy Signature X. Sneezy 18 / 06 / 09 Date 21 / 06 / 09 Date Director s name Director s name Director s name Director s name Signature Signature Signature Signature / / Date / / Date / / Date / / Date

25 QUALIFYING COMPANIES 23 Section 2 Shareholders qualifying company/loss attributing qualifying company election Section HA 5 of the Income Tax Act 2007 (qualifying companies, loss attributing qualifying companies) Please read notes 5, 6, 7 and 8 before completing a shareholder s election. If there are more than five shareholders, complete another election form and attach it to this. I/we elect that Name of company IRD number Seven Dwarfs Limited shall become a qualifying company/loss attributing qualifying company (delete one if applicable) from onwards (see Day Month Year note 2). As a shareholder of a qualifying company, I/we elect that I/we will become personally liable (and/or jointly and severally liable, as the case may be) for each income year during which the election is in effect for such percentage of the company s income tax as set out in section HA 8 of the Income Tax Act 2007 (see notes 6 and 7). Shareholder s name IRD number Mr Happy For company and trustee shareholders only (see note 5) Signatory s name Capacity or office Effective interest 2 % Signature M.R. Happy Signatory s IRD number 18 / 06 / 09 Date Shareholder s name IRD number For company and trustee shareholders only (see note 5) Signatory s name Capacity or office Shareholder s name IRD number For company and trustee shareholders only (see note 5) Signatory s name Capacity or office Shareholder s name IRD number For company and trustee shareholders only (see note 5) Signatory s name Mr Sneezy Capacity or office Shareholder s name IRD number Snow White Ltd (QC) Ms Snow White Director Trustees in the Grumpy Trust Mr Grumpy Trustee/Beneficiary Trustees in the Grumpy Trust Trustee Trustees in the Grumpy Trust For company and trustee shareholders only (see note 5) Signatory s name Mrs Queen (Director) Capacity or office Effective interest Effective interest Effective interest Effective interest Poisoned Apple Trustee Company Ltd (Trustee) % % % % Signature S. White Signatory s IRD number Signature A.B. Grumpy Signatory s IRD number Signature X. Sneezy Signatory s IRD number Signature Mrs W. Queen Signatory s IRD number / 06 / 09 Date 21 / 06 / 09 Date 21 / 06 / 09 Date 21 / 06 / 09 Date

26 24 Qualifying company or loss attributing qualifying company elections (IR 436) checklist If the answer is no, skip to the next question. If the answer is yes, read the action required. Yes Action required Section 1 Directors election Is the company electing to be a QC only? Tick a qualifying company at the top of the form and cross out loss attributing qualifying company where it later states: (delete one if applicable). Is the company already a QC and now electing to be an LAQC? Is the company electing to be an LAQC? Tick a loss attributing qualifying company and don t cross anything out where it later states: (delete one if applicable). A QC will not be able to become a LAQC for any income year starting on or after 1 April Tick both (because to become an LAQC, you must also become a QC) and don t cross anything out where it later states: (delete one if applicable). Is the company newly incorporated? Put the incorporation date as date of becoming a QC/LAQC. Is it a shelf company? Is it an existing company (has previously traded and election will be filed after due date of first active income tax return)? Has anyone signed on behalf of a director (or shareholder in Section 2)? Put the start of the following tax year as date of becoming a QC/LAQC eg, 01/04/2010. As elections can t be made for income years starting on or after 1 April 2011 the company can t elect to become a QC or LAQC. This can only be done if the person holds power of attorney (POA). Attach copy of POA to elections. Reminder ensure all directors have signed Section 1 Section 2 Shareholders election Do you have a company shareholder? One director of the shareholder company must sign Section 2. It must be a QC. If it isn t but is eligible and still in time to be a QC for the entire time it has been a shareholder for this company, attach elections to be processed together. Do you have a trust shareholder? All trustees of the trust and at least one beneficiary who can legally sign the election must sign Section 2. Or a volunteer elector (ie, a trustee) may sign on behalf of a beneficiary who is a minor. If a trustee company is one of the trustees of the trust (ie, holds shares on behalf of the trust but is not the beneficial owner) one director of the trustee company also signs Section 2. Does anyone signing the elections have more than one capacity in the company? Has a nominee or bare trustee signed on behalf of the beneficial owner of the shares? Ensure the person signs Section 2 in each capacity (eg, as an individual shareholder for the shares they own, and as a trustee/beneficiary of the trust for the shares the trust owns). The beneficial owner s name should be shown as the shareholder and the nominee/bare trustee should show their own name as signatory, with nominee or bare trustee shown as their capacity. Section 3 Majority shareholder election Do not complete if all shareholders have already signed Section 2 (ie, not applicable because they have already elected to be liable for their own effective interest) Is one shareholder, or a group of shareholders, electing to be liable on behalf of a minority shareholder/s? If the majority shareholder/s wish/es to be liable for the minority shareholders effective interest of unpaid income tax for the company, only the majority shareholders sign Section 3. The minority shareholders details are provided in Section 3 (name, IRD number and effective interest) but they do not sign Sections 2 and 3 at all. Reminder If it requires more than one shareholder to make up the 50% effective interest for a majority, each of these shareholders sign on behalf of each minority shareholder in Section 3 for it to be a valid majority shareholders election.

27 QUALIFYING COMPANIES 25 Confirmation of QC and/or LAQC status Once the elections have been processed, we ll send a letter to the company to acknowledge that it s registered as a QC and/or LAQC and the date this is effective from. We ll also advise by letter if elections are invalid or late. Please note that tax agents may use the account look-up facility to check whether their clients are registered as a QC or an LAQC and the date they became one. Shareholder liability The shareholders liability for the QC s income tax is based on the shareholders effective interest in the company. Shareholders who can legally sign the election are liable for any income tax the company has incurred but failed to pay during the time it is a QC. Shareholders who hold shares jointly (including trustees, beneficiaries who can legally sign the election and volunteer electors) will have joint and several liability to the extent of their joint effective interest. Summary of shareholders liability Minority Majority Election made, liability based on effective interest Majority election on minority s behalf, no liability Liability based on effective interest Shareholders who make majority elections on behalf of minority shareholders are also liable for those shareholders effective interest Joint majority elections made with other shareholders, joint and several liability for minority s effective interest Nominee Trustee Beneficiaries or volunteers Same as for minority Jointly and severally liable with the elector beneficiaries and/or volunteers, based on the trust s effective interest Liability limited to value of trust s net assets Same as for trustee

28 26 Shareholders effective interest A shareholder s effective or voting interest in a company is measured by the percentage of decision-making rights carried by the shares (and options) in a company, in relation to: dividends or other company distributions company constitution variation of the company s capital director appointments or elections. Example A voting interest calculation A shareholder owns 40% of the shares in a limited company. The shares carry voting rights over distributions made by the company and variation of the capital only. The voting interest is calculated as: Distributions + constitution + variation in capital + directors = = 20% Where a shareholder s economic interest in a company isn t accurately reflected by their voting interest because of other specific factors, the shareholder s effective interest is calculated as the average of the shareholder s voting interest and market value interest in the company. Note Remember that shareholders of an LAQC must have the same rights (see page 13 for more details).

29 QUALIFYING COMPANIES 27 Market value interest A shareholder s market value interest in a company at any time equals their share of the total market value of shares (and options) held in the company. There are specific factors that require a market value interest to be calculated these are called market value circumstances. These are the situations where a market value circumstance exists. The company has debentures on issue to which section FA 2 applies (but not excluded securities or pre-budget securities). The company has shares on issue where a third party guarantees dividend payment. There is an option, other than an excluded option, to acquire shares in the company. An arrangement exists with the purpose of defeating a provision that depends on measuring voting and market value interests. Rules to determine effective interest There are some special rules for calculating the effective interest in a company. Where the shareholder is another company, there is no look through to the ultimate shareholders. If the voting interest or market value interest varies during the year, the effective interest for the period is determined on a weighted average basis. When a shareholder s election is revoked, the voting and market value interests are nil from the date the revocation takes effect. If the shareholder is a trustee, and a beneficiary who can legally sign the election or volunteer elector revokes their election, the trustee s voting and market value interests are nil from the date the revocation takes effect.

30 28 Part 4 How to maintain QC or LAQC status For a company to retain its QC or LAQC status it must continue to meet all of the requirements to be eligible (see Part 2), and have valid elections in place for the whole of the income year. All LAQCs will automatically become QCs at the start of the first income year starting on or after 1 April However, provided a company was a QC or an LAQC for the income year immediately before the income year starting on or after 1 April 2011 it can continue to use the QC rules, but without the ability to attribute losses. The QC status of these companies can be maintained with re-elections as explained below. Re-elections due to changes in shareholding When a QC or LAQC has a shareholding change, the new shareholders must complete and file re-elections with us. The new shareholders must also elect for the company to be a QC or LAQC and to become liable for any unpaid income tax for the company, according to their effective interest. Some of the most common changes in shareholding are where existing shareholders who have previously elected sell all or some of their shares to a new shareholder or where a company issues shares to a new shareholder. In both of these scenarios, the new shareholder must complete re-elections. However, if a shareholding change involves a transfer of shares between existing shareholders only who have both previously elected there is no requirement to re-elect because the shareholders elections still stand as only their effective interest has changed. Please refer to the following table for some examples of shareholding changes and whether re-elections are required to be filed.

31 QUALIFYING COMPANIES 29 Types of shareholding changes and action required Shareholding change A shareholder dies Shares are transferred from an estate to another person A minority shareholder, who had a majority shareholder previously elect on their behalf, becomes a majority shareholder A majority shareholder, who previously elected on behalf of a minority shareholder/s, becomes a minority shareholder A trustee or beneficiary of a trust, or shareholder, who had a volunteer elector sign on their behalf due to being a minor, becomes legally able to sign the election A trust shareholder has new trustees A shareholder sells part or all of their shares to a new shareholder Shares are sold between existing shareholders who have both previously signed valid elections Are re-elections required to be filed? Yes No When are re-elections due? Re-elections are required to be filed with us within 63 days the grace period of the shareholding change. An exception to this is where the shareholding change is due to the death of a shareholder; in this case the grace period is extended to 12 months. If re-elections aren t filed with us within this period, a company s QC or LAQC status is lost referred to as an automatic revocation from the beginning of the tax year in which the shareholding change occurred. If the automatic revocation occured in a tax year starting on or after 1 April 2011 the company will lose its QC status and be unable to elect back into the rules. We have some discretion to consider requests to extend the grace period, or defer the date of revocation when re-elections are filed late. Such requests should be in writing and attached to the late re-elections, and need to clarify the following points: The event and date that made the company and/or tax agent realise the re-elections hadn t been filed within the grace period. Reasons why the re-elections were filed late.

32 30 How to complete re-elections Use the Qualifying company or loss attributing qualifying company elections (IR 436) form to make the re-election. On page 1 show that it is a re-election due to a change in shareholding, and the date the shareholding change occurred. Please note that unlike original elections, Section 1 Directors election doesn t have to be completed for re-elections. On page 2, it is generally only the new shareholders who need to sign if valid elections are still in place for the existing shareholders. There may be exceptions where the original elections involved majority elections or volunteer elections and the shareholding change involves these shareholders.

33 QUALIFYING COMPANIES 31 Part 5 How QC or LAQC status is revoked Ceasing to be a QC or LAQC A company ceases to be a QC or an LAQC in three ways: through a voluntary revocation, or through an automatic or deemed revocation, or by choosing to transititon into an LTC or another entity (see Part 11 on page xx). As they will no longer be able to attribute losses all LAQCs will automatically become QCs from the start of the first income year starting on or after 1 April For an LAQC with a standard balance date (ie, 31 March) it will become a QC from the start of the income year. Voluntary revocation A Revocation of qualifying company or loss attributing qualifying company election (IR 437) may be filed with us when a company chooses to revoke their QC or LAQC status. To be valid, an IR 437 has to be completed by all directors (by signing Section 1 Directors revocation) or by one shareholder (by signing Section 2 Shareholders revocation). Please note that only shareholders can individually revoke QC or LAQC status. When are voluntary revocations due? When an IR 437 is filed with us, the revocation applies from the beginning of the income year in which the form is received unless a later year is specified. We don t have discretion to allow late voluntary revocations to be retrospectively applied. Example The Big Bad Wolf Limited has a 31 March balance date. It originally became a QC from 1 April Later, the board of directors changed its mind about the company being a QC. A director filed an IR 437 with us after 31 March The earliest the revocation can take effect from is 1 April 2010 onwards, so The Big Bad Wolf Limited remains a QC for the tax year. In order for The Big Bad Wolf Limited to revoke QC status from 1 April 2009 onwards, effectively as if never a QC, a valid IR 437 was required to be filed with us on or by 31 March 2010.

34 32 Please note that once QC or LAQC status is revoked for a company through a voluntary revocation this can t be reversed, and the company will not be able to elect back into the QC rules. Automatic revocation When a company fails to meet one of the requirements to become a QC or LAQC in Part 2 it automatically loses its status back to the start of the income year in which the event occurred. Companies can lose their QC or LAQC status when there is a shareholding change and valid re-elections aren t filed with us within the grace period (see Part 4). So, it s very important for a company to monitor any shareholding changes once it becomes a QC. A company can also lose its QC or LAQC status when any of the following events occurs as the company will fail to meet one of the QC rules. A new company shareholder isn t a QC. An existing company shareholder loses its QC status. A trust shareholder doesn t distribute all of the QC dividend income as beneficiary income. A beneficiary of a trust shareholder isn t a person or a QC. There is a variation in voting and distribution rights attached to shares. A company has an income interest in a controlled foreign company or an attributing interest in a foreign investment fund that is a direct income interest of 10% or more. Foreign non-dividend income exceeds NZ$10,000 per income year.