Qualifying Companies and Insolvency: What Shareholders Need to Know
Qualifying Companies (QCs) are a legacy company structure that some New Zealand businesses continue to operate.
While the Qualifying Company regime has not been available for new companies for many years, existing Qualifying Companies remain in place and can provide certain tax advantages when structured and managed correctly.
However, when a Qualifying Company experiences financial difficulty, shareholders need to understand the potential implications.
What Is a Qualifying Company?
A Qualifying Company was designed to provide some of the commercial benefits of a company structure while allowing certain tax treatment similar to a partnership.
One of the key benefits historically associated with Qualifying Companies was the ability to distribute certain capital gains without the need to wind up the company.
This provided flexibility for some privately owned businesses and family companies.
Why Does This Matter When a Company Is in Financial Difficulty?
When a Qualifying Company becomes insolvent, the tax treatment and shareholder obligations need careful consideration.
One important difference is that shareholders of a Qualifying Company may have personal exposure for certain company tax obligations.
This means that if a company enters financial difficulty, shareholders should understand whether there are potential tax liabilities that could flow through personally.
Reviewing Qualifying Company Status During Insolvency
If a Qualifying Company is experiencing financial pressure and there is little realistic prospect of returning to sustainable trading, shareholders should consider whether the existing structure remains appropriate.
The potential benefits of retaining Qualifying Company status may be outweighed by the risk of personal exposure to company tax liabilities.
The right approach depends on the individual circumstances of the company, including:
- The reason for the financial difficulty.
- The company’s tax position.
- Existing shareholder balances.
- Outstanding tax obligations.
- Future trading prospects.
Not All Insolvency Situations Are the Same
A company may become insolvent because of trading losses. In those circumstances, there may be little or no income tax exposure.
However, insolvency can arise for other reasons, including:
- Excessive shareholder drawings.
- Outstanding tax filing obligations.
- Historical profits creating tax liabilities.
- Transactions that have not been properly addressed.
Understanding the underlying cause of the financial difficulty is essential.
Seek Advice Early
When a company is facing financial pressure, understanding the implications of its structure is an important part of assessing available options.
Early advice can help shareholders and directors understand:
- Their obligations.
- Potential risks.
- Restructuring options.
- The most appropriate path forward.
At Pryde Accounting & Advisory Limited, we combine accounting, business advisory and insolvency expertise to help business owners navigate complex financial situations.
About the Author
Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.
Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited