KEY POINTS:
Internationally, New Zealand is one of the best places for business law and economic freedoms.
The 2008 Heritage Foundation/Wall Street Journal Index of Economic Freedom ranks New Zealand's economy as the world's sixth most free, based on categories such as property rights, business freedom and the labour market, and New Zealand obtained the highest ranking for business freedom, with a score of 99.9 per cent.
The work which has been undertaken to further shape New Zealand's new limited partnership regime, due to come into force on April 1, should contribute to us keeping and maybe improving this ranking.
The select committee improvements to the Limited Partnerships Bill released in December in response to public submissions, 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, Britain, Canada, Australia and the Channel Islands, primarily as investment vehicles. Limited partnerships are the most popular choice for private equity and venture capital investment.
Proposals have been afoot in New Zealand since 2003 to provide 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 them 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.
The limited partnerships have one or more general partners who manage the limited partnership and have unlimited liability for the debts of the partnership. They must also have limited partners who are passive investors. So long as those investors do not generally participate in management of the limited partnership, their liability is limited to their investment.
The limited partnerships have no limits on partner numbers or duration (in contrast with the existing special partnership regime, which is being phased out) and no limits on investment, in contrast with the Australian limited partnership model. They will also 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. It is still expected that limited partnerships will be most popular as venture capital and private equity investment funds.
Another concern was that the Bill drew a dividing line between managers and investors, preventing the general partners from contributing capital to the partnership and sharing the profits. The revised version 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 Britain.
A lot of work has been done on the activities in which a limited partner can participate without contravening the "no management" rule. These have been included in a list as a schedule to the Bill rather than relying on secondary legislation. While the activities are based on international equivalents, in some cases they are more favourable to the limited partner, reflecting the difference in size of vehicles in the different 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. This is in line with most international models and the select committee agreed that keeping the identities of limited partners private was a solid 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, and 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.
Limited Partnerships
* Most likely to be used for venture capital investment, but may be used for other types of business.
* Must have at least one "general partner" and at least one "limited partner".
* General partners are liable for the partnership's debts and liabilities.
* Limited partners aren't liable for anything more than their contribution to the partnership, as long as they aren't involved in its management.
* Partnership itself is not taxed, but each partner is taxed individually.
* New rules due to apply from April 1. New vehicle to drive investment
Nick Wells is a partner and Phillippa Wilkie a senior solicitor at law firm Chapman Tripp
