The property investment bubble that burst following the global financial crisis came about partly because of the huge tax refunds many investors were able to claim from their properties.
These refunds enabled investors to borrow heavily and buy more properties. In many cases, the interest on the money borrowed to buy
the properties was more than the rent received, and the investors relied on property prices increasing to make the investment worthwhile.
Investors were able to claim the cost of depreciation of the building and chattels as an expense and this resulted in a refund of money that had not actually been spent, which helped to cover the losses on the properties.
Investors who wanted to be able to claim large tax losses on their investments but who also wanted the protection of a limited liability company often owned their investments through a loss attributing qualifying company (LAQC).
One of the benefits of an LAQC was that the losses could be passed through to shareholders in the LAQC, who could then offset the losses against personal income. Owning properties through an LAQC became a popular form of investment.
However, all this is set to change. On April 1, LAQCs will cease to exist and depreciation on buildings will no longer be able to be claimed. Shareholders will be given a window of opportunity for six months following that date to alter their company structure without adverse tax implications.
The LAQC can be converted to a standard company, a sole trader, a limited partnership, or a new kind of entity called a look through company (LTC).
Each of these options has advantages and disadvantages for different circumstances of investors and it will be important to get expert advice to make the right decision.
Liz Koh is a financial adviser. Her disclosure statement can be obtained free of charge by calling 0800 273 847.
