The Limited Partnerships Bill was recently introduced into Parliament and has now been referred to the Commerce Committee. Public submissions close on 5 October.
The Bill has two principal features:
- It establishes a new regime for limited partnerships based on the limited partnership model commonly used overseas to facilitate venture capital investment.
- It modernises and clarifies the tax treatment of partnerships generally, and gives limited partnerships flow through tax status. In simple terms, this means the income and expenses of a limited partnership will flow through to the limited partners individually, and the limited partners rather than the partnership will account for tax.
The Bill allows limited partnerships to be used for any business other than insurance and banking. Therefore, while the structure is designed particularly to encourage venture capital investment, it can be used as an alternative to a company or other legal form.
Limited partnerships will be registered through the Companies Office, and will be a separate legal entity with full legal capacity. In these respects, limited partnerships are more like companies than conventional partnerships, which are not registered and are not separate legal entities.
Limited partnerships must have a partnership agreement that sets out the affairs of the partnership and the conduct of its business. The partnership agreement is a contract between the partnership and each partner, and between the partners themselves. It therefore has similarities to the constitution of a company, except that it is not registered or available to the public.
Responsibilities and liabilities of limited and general partners
A limited partnership must have at least one general and one limited partner. Any natural or legal person, or a partnership established under the Partnership Act 1908, can be partner.
General partners are responsible for managing the partnership and are together liable for all debts and liabilities of the partnership that the partnership itself is unable to pay. In other words, general partners have joint and several residual liability. General partners cannot provide capital to the partnership unless they are also a limited partner and provide the capital in that capacity.
By contrast, limited partners invest in or provide capital to the limited partnership but cannot manage it. The capital contributed by a limited partner gives the partner a proportionate share in the benefits (such as distributions) of the partnership and in the surplus assets of a liquidated partnership, unless the partnership agreement provides otherwise.
A limited partner can assign their partnership interest to another limited partner or to any other person approved by the general partners, subject to any restrictions in the partnership agreement.
Limited partners are not liable for the debts and liabilities of the partnership, except to the extent that they engage in its management, ie their liability is ‘limited’. If a limited partner does engage in management, they will be liable as a general partner to any person who dealt with the partnership when the limited partner was so engaged and who reasonably believed that the limited partner was in fact a general partner.
The Bill does not define what amounts to engaging in management, but regulations will be made that set out activities (safe harbours) that limited partners can do without being treated as engaging in management. The regulations are expected to allow limited partners some say in strategic matters.
Part 3 of the Bill deals with ‘overseas limited partnerships’. It provides that these must register if they carry on business in New Zealand (which is similar to the registration requirement for overseas companies). The Bill repeals the special partnership provisions in the Partnership Act 1908. Transitions from special to limited partnerships will generally not trigger income tax implications for the partners.
Tax treatment of partnerships
The Bill also clarifies the tax treatment of all partnerships, and sets out the tax treatment of limited partnerships. The tax changes will apply for income years beginning on or after 1 April 2008. The tax provisions include the following key features:
- Partnerships will have flow-through tax treatment, meaning partnership income, expenses, credits, etc generally will flow through to each partner based on their 'partnership share'. Each partner will return tax based on their applicable tax rate.
- Transactions between partners and partnerships (other than certain transactions, notably payments of salaries and wages) will be deemed to occur at market value.
- Subject to some specific exceptions, new entry and exit rules include a requirement that a partner must account for tax upon exiting a partnership where the exit proceeds are more than $50,000 above the net tax book value of the partner's partnership share in the partnership property.
- A partnership is deemed dissolved for income tax purposes where there is a 50% or more change in the ownership of the partnership in a 12 month period.
- For limited partnerships, deductions by partners will be subject to a loss limitation rule.
For more detail on the tax reform aspects of the Bill, please see our NZ Tax Update - September 2007 at http://www.dlaphillipsfox.com/publications/RecentPublications.asp (click on Taxation).
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