The property investment bubble that burst following the Global Financial Crisis came about partly due to 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 or 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 very popular form of investment.
However, all this is set to change. On 1 April, 2011, LAQC’s 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 change 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 or LTC. Each of these options has advantages and disadvantages for different circumstances of investors and it will be very important to get expert advice so as to make the right decision.