Limited Partnerships Bill

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 However, the SP suffers from outdated legislation and lacks certain features attractive to foreign investors.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...