Qualifying Company and Insolvency

Qualifying Companies (QC) have been around for some time; in fact my well-thumbed guide comes from 2005. Qualifying Companies are almost a thing of the past as no new ones can be created, but there are still some that exist.

There are big pluses to being a Qualifying Company, with the capital gains being able to be distributed tax-free without winding up the Company.

A Qualifying Company has the commercial benefit of maintaining a Company structure with the taxation benefits of a Partnership, meaning the dividends will be tax free, except in the instance of Imputation Credits, which can be fully attached.

However, there are some disadvantages including my point that we need to remember that shareholders will be personally liable for any income tax not paid by the Company.

So be aware when it comes to insolvent Companies that are still QC's. If at the stage where it is deemed that the Company is insolvent and there is a possibility or probability that trading operations will not improve to acceptable levels, consider seriously revoking qualifying company status.

The benefit of being a Qualifying Company is not so attractive when the potential for the shareholders to be personally liable for any income tax paid, as a result of insolvency is real.

A revocation shall apply from the beginning of the income year, in which the IRD receives the notice, unless a later year is specified, it is a reasonably straight forward procedure.

It should be noted that the reason for the insolvency is due to operating losses, and there is unlikely to be income tax owing, however, this is not always the reason for the Company's insolvency. There are a number of other scenario's like excessive drawings, or being behind in your income tax filing requirements, meaning prior to the insolvency there is outstanding taxation generated during better times.

In the meantime, I keep my battered 2005 Qualifying Companies guide as a good reference for the odd times I may need to refer to it.

Hamish Pryde Licensed Insolvency Practitioner IP47 - 9th May 2017