Turner Judy: Limited Partnerships Bill Taxation (Limited Partnerships) Bill — Third Readings 
Turner Judy: Limited Partnerships Bill Taxation (Limited Partnerships) Bill — Third Readings 
[Volume:645;Page:14777] 
JUDY TURNER (Deputy Leader—United Future) 
: 
 I rise on behalf of United Future and in particular on behalf of the Hon Peter Dunne to speak to the third readings of the Limited Partnerships Bill and the Taxation (Limited Partnerships) Bill. This legislation introduces new tax rules for limited partnerships and updates the tax rules for general partnerships. The changes are designed to support the new regulatory rules for limited partnerships to make it easier for New Zealand firms to attract international investment capital. 
Under the proposed rules limited partnerships will be taxed in the same way as general partnerships with partners being taxed individually in proportion to their personal share of the partnership income. Limited partners will be subject to new tax-loss limitation rules to ensure that the losses they claim reflect the level of their economic loss. Limited partners will be able to offset only the tax losses to which they have exposure which will help prevent limited partnerships being used as tax shelters. 
The legislation also introduces a new comprehensive definition of “partnership” into the Income Tax Act and clarifies which forms of co-ownership are covered by partnership rules. The new tax definition of partnership is based on that contained in the Partnership Act and covers partnerships defined under that Act as well. New Zealand resident partners of foreign general partnerships in certain foreign limited partnerships are part of that definition as are joint ventures whose members choose to be treated as a partnership for tax purposes and also co-owners of property though not companies or trusts if the all co-owners choose to be treated as a partnership for tax purposes. 
The bill clarifies the appointment of income expenses and other items to partners for tax purposes. The new rules will ensure that income expenses tax credits rebates gains and losses flow through to the individual partners and those items will generally be allocated to partners in proportion to each partner’s share in the partnership income. The rules will allow deductions for expenditure incurred through the original partnership to be claimed by new partners subject to them meeting the other tests of deductibility in income tax law. 
The proposed rules make a number of useful changes that should reduce compliance costs for partners and increase certainty. These include not automatically treating a partnership as having dissolved when there is a change in partners and ensuring that individuals leaving a partnership do not have to make tax adjustments when the tax effect is not significant. 
In addition to these measures the committee has recommended some extremely useful changes to the legislation to make it easier to comply with the rules. These changes include things like making the tax rules clearer when a partnership dissolves ensuring the rule that treats transactions between partners or partnerships as being at market value will apply only when the transaction was entered into to avoid tax clarifying that a partner’s share in the partnership income can be different from his or her share in the partnership’s assets and lastly relaxing some of the restrictions on limited partners’ losses for amounts that are guaranteed by limited partners. 
In the bill as introduced a partnership was treated as having dissolved when there was a 50 percent or more change in the partnership’s ownership within 12 months. This was designed to prevent large asset transfers giving rise to significant deferral of tax liabilities. Submitters expressed concern that a deemed dissolution with an ownership change of 50 percent within 12 months was not appropriate as the operation of the rule was not sufficiently clear. As a result the committee recommended that a final dissolution for tax purposes should occur when the partnership dissolves by agreement of the partners court order or some other way and when the partnership’s business ceases. 
In the bill as introduced most transactions between partners or partnerships would have been treated as being at market value for tax purposes. This requirement was designed to protect the tax base and ensure that assets could not be transferred in and out of a partnership under and overvalued for tax benefits. Submissions were made for this rule to be removed and it was argued that the rule was a departure from existing law and practice and that it can be difficult to determine market value in many cases. The committee agreed that this rule should not affect situations where non-market transactions between partners or partnerships occurred legitimately. Applying the rule in these circumstances could result in high compliance costs and the committee therefore recommended replacing this rule with a specific anti-avoidance rule that essentially deems a transaction to have occurred at market value if the transaction was entered into to avoid tax. 
The committee recommended that the drafting should clarify that one partner’s proportionate entitlement to income from the partnership can be different to his or her share in the partnership’s assets. For example in professional services firms such as accounting or law firms it is common for each partner’s rights to the profit of that partnership to fluctuate from year to year based on individual performance but each partner’s share of the partnership’s assets remains the same. The drafting changes recommended by the committee clarify that this situation is within the policy intent of the new rules. 
To prevent limited partners from claiming excessive losses the legislation restricts limited partners’ losses to amounts that limited partners actually have at risk. For the purposes of calculating the amount of loss that a limited partner is entitled to in the bill as introduced amounts of guarantees were recognised only to the extent of that partner’s share in the partnership. The select committee recommended recognising in a wider range of situations amounts that are guaranteed by limited partners. The full amounts of the debt that has been guaranteed will now be recognised subject to certain restrictions such as where other limited partners have also guaranteed the debt. United Future commends all those who have contributed to this bill and we support its third reading.