Often the first reaction when thinking of setting up a new business or undertaking a new venture is to establish a company. Companies are familiar to us, offer limited liability, are quick and cost effective to establish (at least at a basic level) and people feel as if they understand companies. However, despite their popularity, we commonly see situations where a company is not in fact the best option, due to some of the tax pitfalls that can arise from using a company.
Some situations where companies can present problems and increased tax costs include:
• Where one or more investors have tax losses available to them (or may do in the future)
• Where one or more investors are on lower tax rates for some reason
• Where one or more investors have dependents to whom income could potentially be distributed and then taxed at lower tax rates
• Where capital gains are likely during the course of the project or business
• Where one or more investors are overseas tax resident, or where New Zealand tax residents are investing overseas.
We recommend, particularly in these situations, that consideration is given to other structures such as a limited partnership, an unincorporated joint venture, or a look through company (LTC) rather than an
ordinary company. These can be put in place and deliver the same or similar commercial advantages (such as limited liability) but also potentially much improved tax outcomes in comparison to an ordinary
company structure. This is due to the fact these types of entities don’t pay tax themselves, rather each investor includes their respective share of the overall profit or loss in their own tax return, and they can then deal with the
tax consequences of that in their own way based on their own appetite for risk and their own circumstances. This also provides greater flexibility to adapt to law changes etc. in the future.
If you’re not sure about your situation give one of our specialist tax advisers, or your usual Johnston Associates adviser, a call so you know you’re on the right track.