On 15 October the Government released the much anticipated legislation in relation to the treatment of Qualifying Companies (QCs) and Loss Attributing Qualifying Companies (LAQCs). The key changes to the rules are:  LAQCs will not be able to attribute losses to its shareholders for income years starting on or after 1 April, 2011.  LAQCs and QCs can elect to transition into a new tax entity, a Look Through Company (LTC), or transfer to a partnership, limited partnership, or sole trader structure.   All income and expenditure of an LTC will flow through to the shareholders of the company in accordance with that shareholding interest. Thus, both profits and losses will flow out to shareholders.   A loss limitation rule will apply for an LTC, limiting the losses which will flow out to its shareholders to the economic interest of each shareholder.   For a limited transitional period, existing LAQCs and QCs can transition or transfer without incurring any tax cost, but it is critical that the right choice is made. Each structural option has costs and benefits that apply differently in certain circumstances. The new regime will take effect from the first income year beginning on or after 1 April 2011. For those taxpayers with early balance dates (October 2010 to February 2011) any transition will not occur until the 2012 income year.  Those LAQCs and QCs with a 31 March balance date or later, have until six months after the start of their 2012 income year to elect for the change to take effect in the 2012 year. For example, an LAQC with a 31 March balance date can elect up to prior to 30 September 2011 to be an LTC from 1 April 2011. For existing QCs and LAQCs, the current temptation is to convert to LTCs. However, given the date for elections, the differentiation from the existing LAQC/QC rules and the uncertainty in relation to the application of the legislation, we recommend any taxpayer thinking of transitioning to hold off in the meantime to ensure they fully understand both the current and future implications of the LTC regime.  One issue we have is that the legislation as drafted does not achieve much of what it is suggested it should do (in the commentary). This creates significant uncertainty for taxpayers, and is one reason why we consider patience is the best course of action, at least until legislation is finalised. Further, given the restrictions in the new legislation, we would anticipate that a large number of existing QCs/LAQCs will not gain anything from transitioning, especially given the removal of deductions for depreciation on buildings from 1 April 2011. For example, many LAQCs which owned property will probably cease to be loss making going forward.  A disappointing component of these proposed changes for many taxpayers where an LAQC structure no longer provides benefits, is that there is not a simplified and concessionary transition from LAQC to just being a standard company, without having to sign up for a complicated LTC regime. Surely, if the goal was to eliminate LAQCs, this would have been worthwhile.  While the LTCs look and feel much like LAQC’s, there are fundamental differences which taxpayers will need to understand. Much like the Limited Partnership regime, the LTC regime introduces a loss limitation. Notably, it potentially taxes shareholders on their interest in the underlying assets (which may be taxable), rather than on the sale of the shares (usually on capital account). The LTC regime limits shareholder numbers, but for most it would appear to have wider application. However, one narrowing of this applies to corporate shareholding. While in the existing regime there is the ability to have a corporate shareholder (subject to it being a QC), there is no ability to have a corporate shareholder under the LTC regime.  Finally, while the draft legislation seeks to encourage taxpayers to transition from QC/LAQC structures to other structures such as Limited Partnerships, the drafters have failed to grasp the commercial implications of such, including practical matters such as contractual obligations or security arrangements, which make such changes much more difficult than they envisage. Donna Harkness is an associate principal at WHK.