The much awaited Limited Partnerships Bill was released last month, along with a ‘Commentary on Parts 5 and 6 of the Bill associated tax changes’.
The driving force behind the Bill is the need to establish an internationally recognisable limited liability partnership structure so that New Zealand is not disadvantaged when competing for foreign investment capital. The Bill covers limited partnerships (LPs) both from the legal structure/regulatory perspective and the tax perspective. However, it also clarifies the tax implications for partnerships generally, not just for LPs.
The proposed features of an LP
The proposed LP structure is similar to the current special partnership (SP) structure that exists under the Partnership Act 1908 (Partnership Act). Both have the concept of a special or limited partner whose liability is limited to the amount of capital contributed, and a general partner whose liability is unlimited. However, the SP suffers from outdated legislation and lacks certain features attractive to foreign investors. To remedy the position, the proposed LP structure will:
- Be a separate legal entity from its partners.
- Have the legal capacity to do anything a natural or legal person may do, and be entitled to undertake any business activity except for banking and insurance.
- Have limited partners who contribute capital to the LP but have no (or only a limited) management role, and general partners who manage the LP but do not contribute capital.
- Provide that a limited partner is not responsible for the liabilities of the LP provided that the partner does not participate in its management. A 'safe harbour' is to be developed for limited partners so that they can have some input into how the LP will be run without that amounting to participation in management.
- Be a flow-through entity for income tax purposes, such that each partner returns a proportionate share of income/expenses in accordance with the partnership agreement. LPs will be specifically excluded from the definition of a 'company' for income tax purposes - they would otherwise come within this definition due to having a separate legal personality.
The tax reforms - Parts 5 and 6
The Bill contains a number of proposals to reform and clarify the existing income tax treatment of partnerships generally and includes provisions specific to LPs. If the Bill is passed in its current form, it will:
- Clarify the source rules in relation to partnerships by treating any residence requirement in the source rules as being met where:
- The partnership is an LP; or
- 50% or more of the partnership's capital is owned by partners who are tax resident in New Zealand; or
- The centre of management of the partnership is in New Zealand.
- Clarify the definitions of 'partner' and 'partnership', such that partnerships include:
- Traditional partnerships - ie persons having the relationship described in section 4(1) Partnership Act.
- Joint ventures (JVs) - where all of the JV participants choose be treated as a partnership.
- Co-owners of property - where all co-owners choose be treated as a partnership (but not where coownership arises from being shareholders in a company or settlors/trustees/beneficiaries of a trust).
- LPs - including an overseas LP, but not if it is listed or treated as a separate entity (for purposes other than tax) in its home jurisdiction.
- Adopt a concept of 'partnership share'. The proposed definition of this is 'the relevant share that a partner has in the rights and obligations and other property, status, and things of a partnership, expressed as a percentage'. It is anticipated that this definition will require some further refinement as it does not appear to be easily workable in the context of some partnerships, for example, professional partnerships where voting rights differ according to the subject matter as between say salaried partners and equity partners, where entitlements to income are not in the same proportions as obligations in relation to risk, etc. It may be that a more defined formulaic approach may eventuate (as in the company context where identified 'shareholder decision-making rights' are considered).
- Adopt provisions specific to livestock owned in partnerships, reflecting the fact that partnerships are a common business structure in the farming sector.
- Adopt an anti-avoidance rule to deem transactions occurring between a partnership and any of its partners to be at market value. This deeming provision would not apply to certain things, such as salary/ wages or changes in a partner's interest that are caught by another specific provision.
- Replace the current 'Subpart HD – Partnerships' (which comprises 1 section) with a new 'Subpart HD – Joint venturers, partners and partnerships' (which comprises 12 sections). Amongst other things, the proposed subpart:
- Provides that JV participants (not being in partnership) must calculate their net income taking into account their share of the joint income and deductions.
- Clarifies that partnerships are transparent - the partnership is disregarded in effect and the partner regarded: as carrying on the partnership activity; as having the same status, intention and purpose as the partnership; as having a proportionate interest in the partnership property; and, as being a party (proportionately) to partnership arrangements. However, an anti-streaming rule provides that a partner's share of income, most tax credits, losses, etc. is proportionate to the partner's 'partnership share'.
- Provides rules as to the tax consequences arising from the entry and exit of partners and the dissolution of partnerships. A dissolution of a partnership will be deemed to occur if 50% or more of the partnership interests change in a 12 month period. In very simple terms, a partner will be required to account for income where the proceeds from disposing of that partner's interest exceeds the net tax book value of that partner's partnership share by more than $50,000. There are various thresholds and carve outs from these provisions.
- Includes a tax loss limitation rule for limited partners in LPs (restricting the limited partner's deduction to the 'partner's basis', with any denied deduction being carried forward to the next income year).
- Treat the general partner of an LP as agent for any absentee limited partner.
- Clarify that a partnership, rather than each partner, must comply with the record-keeping requirements of the Tax Administration Act 1994.
- Provide transitional provisions in relation to SPs, including that:
- The loss limitation rules for LPs will not apply to SPs.
- The transition to becoming a LP generally will not trigger income tax exposures to the partners.
Submissions on the Bill close on 5 October and should be directed to the Commerce Committee (as opposed to the Finance & Expenditure Committee that usually deals with tax matters). The Officials’ Report is due 3 December 2007.
It is envisaged that the resulting legislation will come into force on a date or dates specified by Order in Council. However, it should be noted that the tax provisions generally are worded as coming into effect for income years beginning on or after 1 April 2008.
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