Since our communication in August further work has been undertaken to shape New Zealand's impending limited partnership regime, due to come into force on 1 April. The select committee improvements in December of last year in response to public submissions on the Limited Partnerships Bill fine tune the proposed regime and bring it more into line with international practice.
Limited partnerships are used readily in other jurisdictions such as the US, the UK, Canada, Australia and the Channel Islands, primarily as investment vehicles and especially in the areas of private equity and venture capital investment. Proposals have been afoot in New Zealand since 2003 to provide New Zealanders with a comparable vehicle and to use it to compete for international capital. The regime being developed here has drawn significant influence from the international examples, taking and adapting them to the smaller New Zealand market. What is emerging is an exciting blend of international experience but applicable to local circumstances.
The proposed New Zealand limited partnerships are a hybrid of a partnership and a company – they are separate legal entities but nevertheless transparent for New Zealand tax purposes. It is hoped that they will also be treated as transparent by tax authorities in other jurisdictions.
Following the report of the Commerce select committee, it has been confirmed that New Zealand's limited partnerships will have one or more general partners who manage the limited partnership and have unlimited liability for the debts of the partnership as well as any number of limited partners who are passive investors. So long as the limited partners do not generally participate in management (with the exception of some permitted safe harbours) of the limited partnership their liability is limited to their investment. There will be no limit on partner number, duration or investment. A limited partnership is expected to be much easier to establish and administer than existing fund structures.
Tax transparency means that losses and gains are attributed to investors directly in the manner agreed between them – this is particularly effective if losses are expected in the early stages of investment (up to the amount of capital invested) or if a non-taxable gain is to be passed to investors.
The select committee has responded positively to the majority of the key concerns raised during the consultation period. One of those concerns was that the business or activities that a limited partnership could undertake were restricted without good reason. The restrictions on listing on a securities market or carrying on banking or insurance business have now been lifted on the basis that those industries are already regulated. The limited partnership is free to impose its own restrictions through the partnership agreement and some company-style protections have been provided to persons dealing with the limited partnership to uphold their contracts regardless of lack of compliance with such restrictions. It is still expected that limited partnerships will be most popular as venture capital and private equity investment funds.
Another concern of submitters was that the Bill drew a dividing line between managers and investors, preventing the general partners from contributing capital to the partnership and sharing in the profits. However, the revised version of the Bill is generally permissive on this point, allowing limited partnerships to make their own rules in their partnership agreements around profit sharing and general partner participation. This is more consistent with international models.
A written partnership agreement will still be compulsory for all limited partnerships; however, the Bill now gives some guidance on what must be covered by the agreement. The list includes assignment of interests, entry and exit from the limited partnership, meetings and entitlement to distributions. It is expected that certain industries, such as the venture capital industry, will develop a standard form agreement in due course, as is the case in Australia and the United Kingdom.
A lot of work has been done around the concept of "safe harbours", being the activities a limited partner can participate in without contravening the "no management" rule. A list of safe harbours has now been included as a schedule to the Bill rather than relying on secondary legislation. This is an appropriate move considering the importance of these safe harbours to limited partners and their ability to retain their limited liability. While the activities are based on international equivalents, in some cases they are more favourable to a limited partner in New Zealand, reflecting the difference in size of vehicles in New Zealand compared with overseas markets. For example, a limited partner is able to approve or veto any investments to be made by the limited partnership as a member of an advisory committee of the limited partnership.
After much discussion, the confidentiality of the names, addresses and investment levels of the limited partners has been confirmed. Although some of this information will form part of the register of limited partnerships, it cannot be searched by the public and this particular information cannot be the subject of an Official Information Act request. This is in line with the majority of international models and the select committee agreed that keeping the identities of limited partners private was a worthwhile incentive for investors.
The applicable tax provisions have also undergone some material and favourable changes. Of principal concern to submitters were the rules limiting the quantum of losses that can be utilised by investors. These have been improved from an investor's perspective from what was originally proposed – though the maximum loss claimable remains the total capital contributed. Also of benefit is that there is now no deemed disposal of partnership assets on a significant change in partner numbers (which was an attempt to impose a form of continuity of ownership test).
The next step is to ensure that New Zealand limited partnerships are taxed as partnerships in foreign jurisdictions, especially in Australia as our major trading partner. We understand work is underway to see this happen and the select committee was keen to ensure this occurred.
Following these positive developments, the introduction of the limited partnership in New Zealand is imminent and the proposed vehicle will be attractive for those looking to invest or attract investors, especially where losses are expected in the early stages of the investment or where the business is expected to generate non-taxable returns such as capital gains.