Limited Partnerships Bill — First Reading 
Limited Partnerships Bill — First Reading 
[Volume:641;Page:11310] 
Limited Partnerships Bill 
First Reading 
Hon DAMIEN O'CONNOR (Minister of Corrections) 
 on behalf of the 
 Minister of Commerce 
: 
 I move  
That the Limited Partnerships Bill be now read a first time. 
 At the appropriate time I intend to move that the bill be considered by the Commerce Committee that the committee report finally to the House on or before 3 December 2007 and that the committee have authority to meet at any time while the House is sitting except during oral questions and during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House despite Standing Orders 192 and 195(1)(b) and (c). 
The bill establishes a new legal form of limited partnership in New Zealand. Limited partnerships are an internationally preferred means for investing in venture capital. The Government is committed to establishing a regulatory environment that encourages innovation with the consequent development and growth of business. An important part of achieving that goal is to establish a regulatory framework that facilitates the ability of New Zealand businesses to attract venture capital. Venture capital provides a valuable source of funding for new companies and companies that are looking to expand. It can also provide access to new expertise and contacts which can help to develop growth strategies and facilitate access to markets. Attracting venture capital plays a key role in growing globally competitive firms which is one of the Government’s five economic transformation objectives. 
Practical experience in New Zealand and Australia has indicated that the absence of a internationally recognised legal and taxation structure is an impediment to foreign venture capital investment. Of course New Zealand is also disadvantaged through its small size and relative distance from larger capital markets. As a result having an internationally recognised structure that provides liability protection for investors and having the appropriate form of taxation treatment to encourage that investment are vital to facilitating foreign venture capital investment and growing New Zealand’s domestic venture capital industry. New Zealand currently has a form of limited partnership called the special partnership under Part II of the Partnership Act 1908. 
Simon Power 
: It needs updating. 
Hon DAMIEN O'CONNOR 
: As the date of the legislation may suggest it is outdated and does not have all the features that venture capitalists prefer. 
The bill aims to provide an internationally recognised structure and to give New Zealand a regulatory framework that is consistent with international norms meaning that it will be recognised and accepted by investors both in New Zealand and internationally. The particular features that international investors expect to find in a limited partnership vehicle are firstly limited partnerships having a separate legal personality; secondly general partners being liable for all of the debts and liabilities of the partnership and limited partners’ liability being limited to the amount of their contribution to the partnership; thirdly limited partners being able to undertake certain activities commonly referred to as safe harbours that allow them to have a say in how the partnership is run without being deemed to participate in the management of the partnership and consequently losing their limited liability; and lastly flow-through tax status— 
Simon Power 
: What does that mean? 
Hon DAMIEN O'CONNOR 
:—which means that the partnership itself is not taxed I say to Mr Power but that each part is taxed individually at the partners’ personal tax rate. The bill includes those features and as with the overseas limited partnership legislation is designed to create a flexible business structure that encourages investment. 
A key consideration for potential investors when deciding whether to invest is their exposure to liability. Consistent with international best practice the bill provides that limited partners are liable only to the extent of their contribution to the limited partnership but with one exception: if a limited partner participates in the management of the limited partnership and holds itself out to be a general partner it will be held liable just like a general partner would be. The power to set out safe harbours in regulations in the bill is therefore important in order to provide investors with certainty about the activities that they may be involved in without running the risk of losing their limited liability. Regulations setting out those safe harbours will be developed while the bill is in the House. 
Investors also need to know the circumstances in which they can withdraw from a limited partnership. The bill establishes clear rules around the withdrawal of capital and profits from the limited partnership which also aim to protect the rights of creditors. In particular the bill establishes a solvency test similar to that applying to companies which much be satisfied if the partnership is able to make distributions to partners or if a partner wishes to withdraw its capital. 
Rules around the termination of limited partnerships are also very important. The bill establishes an efficient process by which limited partnerships may be liquidated in a similar way to a company. That process plays an important part in protecting the interests of creditors of the limited partnership. 
The bill establishes registers of New Zealand limited partnerships and overseas limited partnerships carrying on business in New Zealand. Those registers will be maintained by the Registrar of Companies. Having a register of limited partnerships will help to provide certainty to third parties that wish to transact with a limited partnership. In particular it means that third parties will know that the entities they are dealing with are properly constituted limited partnerships. Having a register of limited partnerships will also assist in ensuring the effective enforcement of the legislation. 
Because venture capital often operates internationally any limited partnership structure needs to be recognised by legal systems in other jurisdictions. The bill provides a separate legal personality for limited partnerships for that particular reason. In the absence of a separate legal personality there is a risk that the rules around the liability of general and limited partners may not be recognised in a foreign court. 
Taxation treatment is also a particularly vital issue in encouraging local investment in limited partnerships and ensuring that limited partnerships are recognised by international investors. As a result the bill provides for flow-through taxation treatment. Flow-through taxation treatment is a key element of the limited partnership structure internationally and as with the rules governing the liability of general and special partners it needs to be recognised by foreign courts if a limited partnership is going to operate in other jurisdictions. 
It is also important to note that although limited partnerships are focused on developing the local venture capital industry and attracting venture capital investment they may also be used by the broader commercial community as a flexible business structure that has low compliance costs associated with it. The bill places few restrictions on the activities that may be performed by a limited partnership. 
Finally the bill also contains provisions to clarify and simplify the taxation law that applies to partnerships more generally which the Minister of Revenue will address in more detail. 
To conclude the bill establishes a flexible and an internationally recognised structure for encouraging investment. It represents an important contribution to facilitating investment in New Zealand and access to capital by New Zealand companies. I commend the bill to the House. 
SIMON POWER (National—Rangitikei) 
: 
 The National Party will be supporting the Limited Partnerships Bill at its first reading. I take this opportunity to thank the honourable Minister Damien O’Connor for his comments. He certainly cleared up a couple of issues there that had been worrying members on this side of the House. I also take this opportunity to thank the Hon Lianne Dalziel. Right from the start her office was on the phone to me. It gave me a briefing very early in the piece about the contents of the bill and that allowed National members to go to our caucus to seek support for the first reading once we had read the bill and had some discussions with others in a reasonably informed way. 
I noticed that the Minister who has introduced the bill the Hon Damien O’Connor did not mention—and I thought this was quite interesting—the Government’s growth and innovation framework which was launched in 2002. The explanatory note of the bill states: “Venture capital provides a valuable source of funding for new companies and early stage expansion capital.” I will come back to that. It continues: “The Government’s Growth and Innovation Framework launched in 2002 identified promoting foreign venture capital as an element for achieving sustainable economic growth through effective innovation.” I am not sure what that means but I am sure ultimately that the shape of the limited partnerships will provide a proper legal vehicle for international venture capital to feel satisfied that the appropriate legal structure is in place for investment to occur. 
So I thought it was curious as the growth and innovation framework is one of the bedrock strategies of the Government’s economic transformation agenda that the Minister did not mention that framework. I see Maryan Street over there on the Government benches is nodding away furiously to indicate that she will spend some time in her contribution telling us about the strategy and how it links with the Limited Partnerships Bill in providing the necessary legal framework for international venture capital investment. In fairness to Damien O’Connor he is acting on behalf of Lianne Dalziel in seeking to refer this bill to the Commerce Committee a committee that has its share of members who enjoy attention to detail and who I am sure will enjoy dealing with this bill. 
Essentially there are two elements to the bill. The first relates to the establishment of limited partnerships which are as the Minister said international vehicles commonly used to invest across a broad range of jurisdictions. The form of limited partnership presently in the Partnership Act called a special partnership does not have all the features that are preferred by international venture capitalists. New Zealand needs to have a legal structure that other jurisdictions will recognise in order that it can compete internationally for venture capital investment. 
We will see here as the Minister said discussion around how income will be derived from source to partners in proportion to their profit share the flow-through treatment that my colleague Dr Worth will spend some time discussing and discussion around the entry into and exit from partnerships which as I am sure my colleague Dr Worth knows from his expertise in partnership law is not always as straightforward as people think. Partners tend to come and go without the existing partnership structure being dissolved in its entirety and a new partnership structure being formed with new partners. They simply adopt what I guess could be described as a slightly scruffy entry and exit process into and out of a partnership. I know that the Hon David Parker will understand as a former commercial lawyer of some note that when a partner leaves a partnership the entire partnership actually dissolves at law and a new partnership needs to be formed with the remaining or new partners coming into the partnership arrangement. But that is not always observed on the entry into and exit from partnerships. 
The legislation is designed to reduce the likelihood of the under or overtaxation of both the exiting and incoming partners. 
Hon David Parker 
: Particularly for forest partnerships. 
SIMON POWER 
: Perhaps the Minister could take a call and give us a bit of a rundown on how the legislation will affect forest partnerships. Some taxation treatments for limited partnerships will be of interest to the select committee and that is the second element that is dealt with by the bill. The Minister skipped over that part of the bill pretty quickly and to be fair it is complex. Parts 5 and 6 of the bill introduce new taxation rules for limited and general partnerships. At the risk of quoting from an official document and having to table it—though that would require somebody to be paying attention—under the proposed rules the limited partnership vehicle will have separate legal entity status. If the proposed regulatory rules were to be introduced without any change to the taxation legislation I am advised that a limited partnership—and this is important I say to Dr Worth—would be characterised as a company for income tax purposes. I am sure that Dr Worth will be able to talk about that in more detail. As a result of that characterisation income and expenses would not flow through the partnership to be taxed at the partner level but instead would be taxed at the company level. The bill will ensure that limited partnerships will not be taxed. Instead each partner will be taxed individually. 
That sounds a bit complicated and it is. I think the Minister did not do due justice to the bill when he skimmed over its taxation and revenue implications by simply saying to the House and the public of New Zealand that that is something the Minister of Revenue will deal with at some point further down the track. Ultimately the Minister who introduces the bill has the responsibility for doing that and the proposed new partnership rules as set out in the bill will amend the Income Tax Act 2004 in several ways. I do not intend to go into those in detail now because that will be a matter for the select committee. But one thing is certain which is that at first glance this bill appears to be pretty benign. It appears to be a vehicle that is set up to attract and allow international venture capital to flow through to those investing in such a structure in a pretty straightforward way. But there are quite significant taxation and revenue implications from the bill. I see Maryan Street is nodding over there. She is keen to explain that flow-through taxation treatment to the House and the public of New Zealand in perhaps a simpler way than I have been able to. 
I just want to reaffirm that in this first reading debate National earmarks those issues around taxation and revenue as being matters that we will look at closely at the select committee. We agree to support this bill at the first reading because we believe that the structure of limited partnerships for attracting international venture capital and getting over that multi-jurisdictional difficulty is important but the taxation treatment of those investments and the flow through to the partners of the particular entity chosen for that investment will need to be the subject of more scrutiny at the select committee. But as I said National will support the first reading and the bill’s referral to the select committee although we are concerned about the expansive nature of the procedural motion the Minister will put to the House at the point of referral. We certainly will not be supporting the sitting times and proposals the Minister has suggested to the House procedurally but substantively we will support this bill at the first reading. 
MARYAN STREET (Labour) 
: 
 It gives me great pleasure to rise to speak to the Limited Partnerships Bill. I would like to speak in particular about its purpose and the impetus for it. Clearly one of the key concerns the Minister the Hon Lianne Dalziel had in introducing this bill was to enable easier access to investment capital. What that means is that there would be more opportunities for New Zealand businesses to expand and develop. 
Venture capital as a subset of investment capital is a valuable source of funding for new businesses and is a valuable source of early stage expansion capital for businesses in New Zealand. It is part of a programme that I wish to draw the House’s attention to and it is a programme that the Minister of Commerce has been engaged in for some time—that is the improvement of the business environment by the improvement of regulation and in this case of tax treatment for businesses. This has its origins in the Growth and Innovation Advisory Board launched in 2002 and in fact comes out of that board’s work. It is substantially welcomed by business in New Zealand and I will move on to that in a moment. It is important to recognise that this bill is the latest contribution of many to modernising the regulatory environment within which New Zealand business operates. That has been a key concern of the Minister of Commerce. As we have heard already it is clear that limited partnerships are commonly used in many other countries as a vehicle for venture capital investment. So it makes sense to have New Zealand tax rules that facilitate a similar kind of investment here. 
The bill can be largely characterised I suppose as having the following key regulatory features: firstly general partners who are liable for debts and obligations of the partnership; secondly limited partners whose liability is limited to the amount of their investment as long as they do not take part in the management of the partnership; thirdly provision for safe harbour activities so that limited partners are able to participate in strategic activities without this affecting their liability; and fourthly provision for a separate legal personality or identity for limited partnerships. These changes which are promoted and outlined in this bill should really pave the way for New Zealand to have access to the same kind of venture capital markets that overseas businesses have. Essentially the tax rules proposed which are one particular component of this bill are investment friendly and will enable New Zealand to be more competitive in attracting venture capital. Specifically limited partnerships will not be taxed at the partnership level as the Minister who moved the first reading itemised. Instead each partner will be taxed individually in proportion to his or her share of the partnership income in the same way that income from general partnerships is taxed. The limited partners’ tax losses in any given year will be restricted to the level of their economic loss in that year. 
There have been a number of very favourable responses to the introduction of this bill and I would just like to quote from a couple of those. Firstly a press release which is advice from a law firm states: “Regime would position New Zealand as one of the best countries in the world to do business”. It is a modernising instrument. The press release also notes that where New Zealand was ranked 19th out of 55 countries evaluated in the 2007  
World Competitiveness Yearbook 
 the improvements that are needed to increase that ranking are contained in this respect in this bill. In other words this bill will go a substantial way to improving New Zealand’s competitiveness despite our distance and isolation from some markets and it will go a considerable way to improving our competitiveness in accessing venture capital. I could quote from other publications. The New Zealand Venture Capital Association believes that this bill and the regime contained in it is one of the most important current policy initiatives for New Zealand’s private equity and venture capital industries. Now that is no mean feat. 
 What we are keen to do in the Labour-led Government is to continue the process of modernising the rules and regulations surrounding businesses by not only adjusting the tax treatment of limited partnerships but providing sufficiently competitive regulation around them to enable New Zealand businesses to profit by having greater access to venture capital so that they can invest in new ventures and in developments in business that may be at the higher end of risk in the market. With the kinds of accolades that this bill has been receiving in the marketplace from people who have an interest in this area it is clear that we are going in the right direction. I am pleased that the previous speaker has indicated the National Party’s support for this. New Zealand should indeed continue in the trend of making our legal framework our institutions and our approach commercial balanced and world leading. This legislation is a further contribution to that. 
Dr RICHARD WORTH (National) 
: 
 1908 was a pretty amazing year in the life of the New Zealand Parliament because in that year a whole lot of legislation was consolidated. Those of us who went to law school some years ago had to deal with a lot of statutory material that flowed through in that particular year. One of those pieces of legislation which is the subject of this bill by way of change was the Partnership Act 1908. As a previous speaker has said Part 2 of that legislation has very detailed provisions relating to special partnerships patterned on what went on in the UK in 1907. 
In section 49 of that legislation there is a provision that is headed: “Special partnerships may be formed except for banking and insurance”. That is interesting because in this particular bill there is a similar exemption for banking and insurance. The provision in 1908 read in part: “Special partnerships may be formed for the transaction of agricultural mining mercantile mechanical manufacturing or other business by any number of persons upon the terms”—that is the terms set out in the legislation—“… Provided that nothing herein shall authorise any such partnership for the purpose either of banking or insurance.” Now it is an interesting question as to why that exemption has been carried forward into this legislation which as Simon Power boldly acknowledged on behalf of National we support. He has invited me to make a number of comments about flow-through of income expenses and other items. Certainly if there is time I will do that because that involves I think a reasonably complex explanation around clause 116. 
But I thought I would start off by saying what we are talking about when we are talking about limited partnerships. Limited partnerships are a form of partnership very similar to general partnership except that in addition to there being one or more general partners there are one or more limited partners. These general partners are in all major respects in the same legal position as partners in a conventional firm. That is they have management control they share the profits of the firm in predefined proportions and they have joint and several liability for the debts of the partnership. As in a general partnership the general partners have apparent authority as agents of the firm to bind all the other partners in contracts with third parties. Like shareholders in a corporation the limited partners by way of contrast have limited liability. Now that means they are liable only on the debts incurred by the firm to the extent of their registered investment and they have no management authority. 
If one is interested in the history of these sorts of structures then one goes back a long way in history to find limited partnerships existing in a Roman context. The earliest limited partnerships were called societatespublicanorum and they arose in Rome in the 3rd century BC. During the heyday of the Roman Empire they were roughly equivalent to today’s major corporations. Many of them had hundreds of investors and the interests were publicly tradable. However they required at least one partner and often several partners with unlimited liability. So it was really no surprise that in medieval Italy the concept was revived as I understand it around the 10th century as what was called the commenda a business organisation that was generally used for financing maritime trade. If one looks then at what went on in Europe both with Colbert’s ordinance of 1673 and the Napoleonic Code of 1807 one finds that this concept of limited partnership is reinforced. If one goes to Japan—and I do not think I have time to deal with that—one can see that same concept with a number of quite sophisticated subtleties worked through. 
But let me just say something about venture capital now because maybe there is some misunderstanding as to the scope of that phrase and the nature of that activity. It is a type of private equity capital that is typically provided by professional outside investors to new-growth businesses. It is generally made as cash in exchange for shares in the investee company. It is usually high risk but obviously it offers the potential for above-average returns. A venture capital fund is a pooled investment vehicle often a limited partnership that primarily invests the financial capital of third party investors in enterprises that are too risky for the standard capital markets or bank loans. That is not to say that it need be restricted to cash. For example venture capital can also include managerial and technical expertise. 
The hope with this legislation is that we will give venture capital funds a significant impetus. One only needs to look at the information that is in the public domain about the extent of New Zealand venture capital—and the latest numbers available to me are 2005—to see that we have a long way to go. The data that I am most familiar with is work that was done by Ernst and Young in 2005. That work made a number of I think interesting findings which included these: first that $212 million was in that particular year invested across 72 deals which was a 34 percent increase in dollars invested compared with the previous year; and second that $148 million or 70 percent of the dollars invested were private equity funds while $64 million or 30 percent was invested by venture capitalists. As members would expect I guess the leading sectors measured by dollars invested were health and biosciences accounting for 30 percent; technology accounting for 13 percent; and business financial services accounting for 11 percent. So health and biosciences were assisted by the largest individual deal for 2005 being the Ironbridge Capital purchase which some of us will be aware of. If one looks at who the players were in 2004 and 2005 one can see that we can go a lot further than was currently the position then. The players then were companies such as ANZ Capital Intellectual Capital Partners Direct Capital private equity Pencarrow private equity Rangatira and others. 
I would like to take up the invitation that Mr Power has extended to me to talk about the complexity of the taxation provisions which as I have said have a focus on clause 116. One can summarise what clause 116 is about pretty much in this way: the Income Tax Act will be amended to allow income expenses tax credits rebates gains and losses to flow through to individual partners. Income tax credits rebates gains expenditure or loss will generally be allocated to the partners in proportion to each partner’s share in the partnership income. A partner as one would expect will be able to deduct partnership expenditure incurred by the partnership before he or she became a member subject to the other deductibility tests in the Income Tax Act. I do not think I have time to go into those subtleties. 
The changes will apply to income years beginning on or after 1 April 2008. The focus is in new section HD 2 of the Income Tax Bill because it will clarify that the income the tax credits the rebates the gains the expenditure or the loss allocated to a partner in an income year will generally be allocated in proportion to each partner’s share in the partnership’s income under the partnership agreement. If there is no partnership agreement then the position will presumably be that these items will be apportioned to partners under the Partnership Act 1908 or whichever law determines their right to a share in the partnership’s income. So what this is all about is that the proportionate approach prevents streaming of these items to specific partners by requiring them to be allocated to the partners in the same proportion as their respective shares in the partnerships income. There is much more that I would like to say about this legislation but time clearly does not permit it. 
R DOUG WOOLERTON (NZ First) 
: 
 New Zealand First supports the Limited Partnerships Bill. I am sorry that I do not have the education to be able to talk about Roman history as far as it extends to limited liability companies— 
Dr Richard Worth 
: The Japanese example. 
R DOUG WOOLERTON 
: —the Japanese example or any other example. But I have to say that listening to Dr Richard Worth’s intelligent contribution was well worth it and I am just sorry that radio listeners could not share in what we were able to see and that was the rapt adulation with which Bob Clarkson was looking at Richard Worth. That alone was worth the effort of being in this Parliament. I might say that Bob Clarkson is not returning to me a look of rapt adulation at this point! 
We support the Limited Partnerships Bill because it brings New Zealand up to date and aligns our laws with international law in an area where New Zealand is particularly apt and that is in the area of innovation. It is modern stuff we are talking about here. Every day we hear about the intervention of angels which is not the intervention of angels I was taught about at Sunday school or even Bible class. I wonder whether Bob went to Bible class. I do not know whether he did. 
Bob Clarkson 
: Yes I did actually. 
R DOUG WOOLERTON 
: But they are not those sorts of angels. 
Bob Clarkson 
: I’m a Christian too. 
R DOUG WOOLERTON 
: I am a Christian too my friend. It is a broad Church is it not when it can have both of us within it. The thing is that these are not those sorts of angels; these are people who come along and put up money or advance money not always out of self-interest to entrepreneurs who have a business idea that needs to be taken further and needs some pretty big money to go with it. The limited partnerships that we are talking about here are a vehicle for them to be able to do that. 
One of the good things about these limited partnerships is the flow-through treatment of taxation and I am mentioning flow-through treatment of taxation only because it seemed to impress Simon Power. I think that Mr Power felt he is the only person in the House who actually knew what that meant—but he was not sadly. Flow-through taxation is important because these people who put up money are able to get tax advantages commensurate with their wealth. In other words they are not being taxed through the company; it is at the tax rate that they personally have. So that is important. It is something that is undersold in this country because we do not see the fruits of these people’s labour often enough. They start off here they get the venture capital then sadly they usually have to go to Europe or America to take the idea and the business to fruition. 
New Zealand First would like to hope that the day comes—and we hope this will be possible in New Zealand—when we can provide enough venture capital in this country so that these people can see out their visions without having to go offshore with many of them never returning. This bill is one little step on the path to doing that we recommend it to the House and we are proud to support it in its entirety. 
NANDOR TANCZOS (Green) 
: 
 The Greens support the Limited Partnerships Bill because we support measures that will see greater access by New Zealand entrepreneurs to investment capital. It has often been remarked that access to venture capital in particular has been fairly limited in New Zealand for some time. Although admittedly high rates of interest in New Zealand in more recent times has seen capital flow into the country as international financiers have seen the good returns to be made in this country it is not so clear that capital has found its way into the kinds of enterprises that we hope this bill will benefit. Neither should we have to rely on a crippling interest rate to get capital into the country and to our entrepreneurs and innovators. So the Green Party supports measures to establish a tax and legal structure that will facilitate venture capital in particular. 
This position may surprise some observers. The Greens have wrongly been seen by some commentators as anti-business and anti-investment. That is not at all correct. We certainly have concerns about foreign investment rules that allow international capital to buy up major stakes in key New Zealand infrastructure strategic assets and extensive landholding including some of our most iconic coastal high country and other landscapes with little impediment. We have concerns about practically unrestricted access for foreign capital to our most successful businesses and enterprises to the extent that foreign investment in New Zealand has been largely restricted to the buying up of stable and successful concerns. That has sometimes been accompanied by the stripping of the assets. Essentially what we have seen at times in this country has been the ram-raiding of the New Zealand economy aided and abetted by the New Zealand Government. That kind of investment if we can call it that does not help New Zealand or New Zealanders and we will continue to oppose the current overseas investment rules which facilitate if not quite smash-and-grab investment then at least the control of key strategic assets by overseas interests. 
There is a great deal of difference between that kind of investment and the kinds of investment that this bill is aimed at facilitating. The Green Party certainly supports rules that make it easier for New Zealand start-ups to access capital. I know how it is when one has a good idea a lot of energy but few assets. I well remember discussions with my bank manager about getting access to even short-term loans for demonstrably profitable purposes to be told that capital would be available only if I could secure it with property or if I had the equivalent amount of money in a term deposit account. I never quite understood the logic of that because if I had the money I would not be leaving it in a term deposit account to earn less interest than the bank was going to charge me for the money I was going to borrow. Why would I do that? I would be working the money. But it just illustrates the tendency of New Zealand lenders to avoid not even risk but actually anything novel. So instead they support the tried and tested safe business-as-usual options which is why New Zealand companies need to get better access to investors who are prepared to take a risk in order to unlock the very real entrepreneurial spirit that many New Zealanders have not just those who are generally recognised as business leaders. 
 It is interesting to note that Maori in particular have been identified as being one of the most entrepreneurial peoples in the world. I cannot help wondering how many more successful Maori businesses there would be if people with good ideas did not have to struggle so hard against the kind of discrimination I am certain Maori business people face in terms of access to finance. 
I certainly know many young people—actually not so young any more but young when I was young—both Maori and Pakeha who started their own businesses only to see them either fail or struggle for years just to keep their heads above water because they could not get access to the capital they needed to make their businesses really hum. So the Greens certainly see the benefits of introducing measures to improve access to capital for start-ups and for businesses needing capital for expansion and generally to support our entrepreneurial and innovative businesses. 
We also recognise that much of the innovation does not come just from the old school. In fact some big-business operators and investors are not as innovative and entrepreneurial as they claim. They are often conservative and dull. They rely on small fish struggling through with their innovative ideas and if those small businesses manage to survive and even grow then big businesses will gobble them up while smugly telling themselves how innovative they are. It reminds me of a badge I once saw: “I learnt everything I know by killing smart people and eating their brains.” That is the kind of operating system we have in this country when it comes to supporting innovative creative small business. That is not to say that there are no genuinely creative or innovative people in the big-business sector—there certainly are—but simply to point out that if we want to get real about it then we have to find better ways to support the fresh the novel and therefore inevitably the risky and the untried. We hope that this bill will do that. 
TE URUROA FLAVELL (Maori Party—Waiariki) 
: 
Tena koe Madam Speaker. Kia ora tatouiteneipo. Hei wawahitakukoreroiteneipo ka huringawhakaaro ki Turangawaewae ki Ngaruawahia ki teneirangiwhakahirahira te raipotaengia a KingiTuheitia hei Kingimo te motu. E taku Ariki tu mai tu mai tu mai ra. KingiTuheitia ko koe tenei e whaianaingatapuwae o ratoukuangaro atu i te tirohanga kanohi. Ko koe tenei e arahineiito iwi Maoriieneirangi. Tu mai tu mai tu mai ra. Kia ora mai tatou. 
[An interpretation in English was given to the House.] 
[ 
Greetings to you Madam Speaker and to us this evening. By way of prefacing my address thoughts turn to Turangawaewae and Ngaruawahia to this wonderful day when King Tuheitia was made a monarch of the land. To His Excellency arise arise rise up before us. King Tuheitia this is you following the footsteps of those who are no longer among us leading your Maori people in these times. Arise arise rise up before us. Greetings to us all. 
] 
I did wonder with regard to the nature of the title of the bill the Limited Partnerships Bill whether we were talking about something very dear to my heart Te Tiriti o Waitangi. I think about the numerous parliamentary petitions court cases tribunal findings pilgrimages to Buckingham Palace Court of Appeal hearings and members’ bills that have emerged and that remind us that the Treaty partnership is indeed a limited one—for sure Madam Assistant Speaker—fore shore! You see a Treaty partnership that honoured the commitment of its signatories would have resulted in tangata whenua being self-determining in all that we do. My vision of an unlimited Treaty partnership would be seen in Maori having an economic base that is not restricted by the stranglehold of Government dependency but that enables us to manage our own resources in our own way. 
I do have confidence however that the contribution Maori are making to the nation is demonstrated by a growing and flourishing Maori economy—an economy that is generated out of our expanding asset base in fisheries forestry and land-based businesses; an economy in which over 16000 Maori are in business; and an economy created by Maori whom the Global Entrepreneurship Monitor has confirmed as the third most entrepreneurial people as Mr Tanczos alluded to earlier. Yet it is an economy I am told in which the Maori untapped employment potential is around $45 billion—an economy in which Maori businesses are threatened by a lack of business expertise financial skills and experience in acquiring capital particularly sustainable capital. That is the Maori Party’s key interest in this bill. We know that Maori business has become a major contributor to the New Zealand economy and that everyone prospers from improvements that could assist Maori businesses to succeed. As the saying goes: “What’s good for Maori is good for Aotearoa.” 
Will limited partnership models be good for us? This legislation sets up a new business structure: limited partnerships. It sets up an internationally recognised legal and tax structure through which venture capitalists can invest meaning that we can attract more foreign venture capital investment. Much like a company limited partners will provide investors with limited liability. The legislation is set out so that limited partners are liable for the debts and liabilities of the partnership only to the extent of their contribution to that partnership. Another key aspect lies in the taxation structure known as flow-through tax status where the partnership itself is not taxed but where each limited partner is taxed individually at his or her personal marginal rate in proportion to his or her share of the partnership’s income. 
So how can this be good for Maori? It is all to do with maintaining the momentum. What we know is that Maori and non-Maori have a similar proportion of start up but the difference is felt in the staying power of the new businesses where currently non-Maori firms have it all over Maori as Mr Tanczos spoke about earlier. So although Maori are great at starting up businesses only 37 percent of Maori entrepreneurial start-ups survive 3½ years compared with 62 percent in the general population. If Aotearoa was to adopt a limited partnership structure consistent with international norms businesses would be more able to access some of the $20 billion to $29 billion that a recent survey predicts will be invested by venture capitalists in the United States in 2007. 
Some of our people would ask: “Why on earth should Aotearoa open up opportunities for wealthy international investors to come to our shores with their fat chequebooks in their pockets?”. We will be looking to the advice of these critics to guide us as to the risks of overseas investors coming here to invest in return for shares equity a measure of control and even the possibility of moving the centre of control from outside of our shores and away from the business owners themselves. Last year Richard Jones Chief Executive of PoutamaMaori Business Trust discussed the potential for venture capital funding to help grow Maori businesses. Although he noted that many Maori businesses are in need of capital he warned that most Maori businesses would be too small to even get a look in. He also warned that such capital comes at a price stating: “they will want to have a stake in the business as well as have some control even to the point of running it so investment of this nature is not for the faint hearted”. 
But we are keen to hear from others involved in Maori business faint-hearted or not and the investment industry to learn whether there are opportunities that limited partnerships and the access to venture capital investments it facilitates may provide. As they say: “Where there’s a will there’s a way.” and if there is one thing that Maori businesses show us it is that will to succeed. The challenge we have always faced in any business ventures we were involved in was the ability to gain long-term sustainable investment on our terms that would provide the general capital to support our ideas. Sure Te PuniKokiri funding is limited to engagement funding—facilitating networks—but it was always insufficient to support the range of business ventures we were keen to explore. 
The challenge for Maori business operators is twofold. First they must attract investment by presenting a proposal that has sufficient credibility to convince genuine investors that the project will be sustainable and yield long-term results. Second they must have done the due diligence in the first place to guarantee that risks have been analysed and to know the market and the capacity of the investor to support their project in the long term. One of the ironies of the Maori business sector in Aotearoa is that although Maori businesses are present right across the export and domestic spectrums there are serious shortfalls in their capacity to attract and achieve sustainable funding. Maori businesses have told us that in reality there is often more likelihood of wealthy international investors being interested in their projects than our own local sources of funding. 
The million-dollar question is to work out the basis of the allegation that New Zealand funders have a prejudice against Maori businesses in the first place. What is the nature of the institutional racism that prevents domestic investors from investing in Maori business entrepreneurs in a way that will achieve long-term meaningful success? I remind the House of the urgent and pressing reality of New Zealand’s demographics. By 2050 it is estimated that half of the population will be brown. So with the right investment today Maori and Pasifika businesses will play an integral role in the economic sustainability and strength of New Zealand’s future. Although answers must be demanded as to why Maori businesses are not attracting local investment the Maori Party will support any initiatives that can open doors for securing a positive investment. 
We look to the new limited partnership business structure as a way of supporting Maori business start-up and expansion and particularly to the high-tech developments favoured by venture capitalists such as telecommunications biotechnology information technology and software development. Our people have a proven track record for technological innovation and we need to be given every opportunity to develop our resources on our own terms and consistent with our own tikanga. The Maori Party will be looking for sufficient security in the legislation to safeguard investment. The last thing we want to see with this legislation is that it opens up Aotearoa to rogue investors and to a further plundering of our natural resources. Maori will do everything in our power to prevent that from happening. 
Over the last few weeks the nation has been grappling with social issues that critics and commentators have been ever so quick to label the “Maori problem”. But when outfits like Bridgecorp fail and many mums and dads lose their savings no ethnic group is identified with that failure. I wonder why that is. As with those issues and given the wealth of people development innovation technological strength and productivity demonstrated in Maori businesses the challenge I would put to members of this House is to ask why those businesses are not receiving the investment funding they should. The demand for strategic investment in Maori small-business enterprise is heavy—at start up early stage development expansion and the ongoing viability stages of business. 
The Maori Party celebrates Maori successes and our international reputation as formidable entrepreneurs. We look forward to the select committee process to see if and how Maori businesses stand to prosper from the Limited Partnerships Bill. Kia ora tatou. 
JUDY TURNER (Deputy Leader—United Future) 
: 
 I stand on behalf of United Future to speak to the first reading of the Limited Partnerships Bill. We are very pleased to support the introduction of this bill which proposes regulatory rules designed specifically for limited partnerships—an investment vehicle that is widely used in other countries for venture capital investment. 
Having an internationally recognised legal and tax structure for limited partnerships in New Zealand will obviously make it easier for our businesses to gain access to investment capital. The associated tax changes are contained in Parts 5 and 6 and they introduce new tax rules for limited partnerships and clarify and modernise the tax rules on general partnerships. Under the proposed rules limited partnerships will be taxed as general partnerships are taxed: each partner will be taxed individually in proportion to his or her share of the partnership income. Limited partners will be subject to new tax loss limitation rules in order to ensure that the losses they claim reflect the level of their economic loss. For tax purposes limited partners will be able to offset only the tax losses to which they have exposure which will help to prevent limited partnerships from being used as tax shelters. 
The bill introduces a new comprehensive definition of “partnership” into the Income Tax Act and clarifies which forms of co-ownership are covered by the partnership rules. At present the Act does not contain a general definition of partnership. The new tax definition will be based on the definition of “partnership” contained in the Partnership Act. It will cover not only partnerships as defined under the Act but also other types of partnerships including New Zealand resident partners of foreign general partnerships and foreign limited partnerships; joint ventures whose members choose to be treated as a partnership for tax purposes; and co-owners of property though not companies or trusts if all the co-owners choose to be treated as a partnership for tax purposes. 
The bill clarifies the apportionment of income expenses and the other items to partners for tax purposes. The new rules will ensure that income expenses tax credits rebates gains and losses flow through to individual partners and those items will generally be allocated to partners in proportion to each partner’s share in the partnership income. The proposed rules will allocate deductions for expenditure incurred through the original partnership to be claimed by new partners subject to their meeting the other tests of deductibility in income tax law. The proposed rules will provide that for tax purposes partnerships will not automatically be treated as having dissolved when there is a change in partners. Furthermore people leaving a partnership will not have to make tax adjustments when the tax effect is not significant. 
In closing we welcome the introduction of this bill. The tax changes it proposes are designed to bring greater clarity and certainty to the rules governing the taxation of partnership income as well as to clarify and simplify the record-keeping requirements for partnerships. We are happy to support this first reading. 
Hon DAVID PARKER (Minister of Energy) 
: 
 I first thank Dr Worth for his very erudite explanation of the principles that lie behind the differences between general partnerships and special partnerships. I do not intend to traverse the area that he traversed so well. I endorse everything that he said and would like to compliment him on the clarity of his explanation. I would like to take it a little bit further in terms of the issue that he touched upon at the end of his speech when he was dealing with the taxation consequences of different structures which is the main reason behind the new principles that lie behind this Limited Partnerships Bill. 
Listeners who are interested may or may not be aware that when people invest in a company except if it is a very small company of up to five shareholders where some different rules can apply the profits or losses of the company are profits and losses of the company and they do not directly flow through to shareholders. So the effect of that is that if one has a new company that is set up to pursue a risky venture which then fails the losses that have been made by that company effectively die with the company. The investor in the company does not get a tax write-off for the losses that the investor has effectively suffered through the company but that are not attributable to him or her except in the limited exception of very small companies called loss attributing qualifying companies. 
So this bill tries to address that issue by creating a new category of partnership where the tax benefits of partnership losses flow-throughs to partners apply without the unlimited liability that normally follows for partners in a general partnership. The general rule in respect of general partnerships is that all members of the partnership face joint and several liability for the debts of the partnership. 
If an individual is investing in a risky venture that may in turn be investing in a risky new product that could be in the interests of the world to be brought forward—because it is a new technology that reduces environmental harm for example—there is none the less quite a level of risk that can attach to some of those new ventures. That risk does not relate just to the loss of money that is invested in the venture; it could relate to product liability risks for a new technology or indeed a new medicine. In those circumstances an older person who does not want to put at risk his or her home if he or she invests in this new venture might well say: “I’m not going to invest in this very worthy project because I don’t want to face joint and several liability if the partnership goes wrong.” That is quite a realistic fear for some people. They might say: “I am willing to risk the money that I want to invest here but I do not want to risk the home that I live in with my family so I am not willing to invest on that basis.” So this bill tries to devise a new structure that overcomes that impediment to investment in new technologies. 
This is part of the Government’s economic transformation agenda. This Government realises that in order to lift the economic performance of New Zealand we need to have higher-value exports. Although it is true that a lot of those higher-value exports will come from our traditional export sources like primary industries and the expansion of existing areas of endeavour it is also true that new areas of endeavour that are backed by venture capital will need substantial investment in order to bring forward these new and high-value products and services that we can sell to the world. Such investment will improve the wealth of our country and help to fund the social services of education and health that we in the Labour Government hold dear. So these new structures will assist by making investment in venture capital endeavours more attractive to those investors. 
We have to take care in this area not to create tax loopholes that can be inappropriately rorted by people. Of course New Zealand has a history in recent decades of its partnership structures being used inappropriately to cause tax benefits that have been disproportionate to the investment made. 
Hon Clayton Cosgrove 
: Who would do that? 
Hon DAVID PARKER 
: Many people did that in the 1980s and early 1990s particularly in bloodstock partnerships and film partnerships that were promoted where there was non-recourse lending that maintained the ruse that there was a real loss being suffered that flowed through to the tax returns of partners in those partnerships. The reality was that those losses were being overstated because through a tax jurisdiction like Hong Kong or the Cook Islands money was actually coming back to the lender of the money in the first place. So this bill has provisions in place to ensure that that sort of rort is not permitted whilst bringing forward the benefits of limited partnerships. 
In terms of one other area that Simon Power mentioned—the terms of entries and exits into partnerships—one of the other parts of this bill creates amendments to the Income Tax Act in order to tidy up what has been existing practice. In theory when people exit from partnerships the whole of the partnership comes to an end every partner’s tax liabilities are triggered by that cessation of partnership and a new partnership in law forms on the same day in respect of the remaining partners if they choose to continue. In effect that meant that in forestry partnerships where there might be 25 people in a partnership that could run for 30 years while the trees grew when one person withdrew from that partnership there was in theory a tax consequence for all of the other partners whose tax liabilities would be affected by the retiring partner. This bill tidies that up by making sure that it is only the tax affairs of the withdrawing partner and any new entering partner that are affected by that sort of transaction rather than those of every partner. 
For those reasons and others which have been well traversed by other speakers I commend the bill to the House. 
LINDSAY TISCH (National—Piako) 
: 
 As members have heard from other National speakers we will be supporting the Limited Partnerships Bill. 
The key features have been articulated but I think it is important to reiterate them. Under this bill a limited partnership can be formed for any business purpose except for insurance and banking—and it is important to identify that—and is formed upon registration with the Companies Office. A limited partnership will be a separate legal entity—and that is significant—unlike a general partnership or a special partnership and any legal person may be a general or limited partner. A limited partnership must have at least one general and one limited partner. The function of the general partner is to manage the business of the limited partnership and the function of the limited partners is to provide money or assets to fund that business. The general partner will be liable for the debts and liabilities of the limited partnership. Limited partners’ liability will be limited to the amount of their contribution to the partnership. The bill also establishes safe harbours that allow limited partnerships to participate in the management of the investment partnership without tainting their limited liability status. 
Another important feature is the special partnerships which Dr Worth mentioned under the Partnership Act 1908. These are to be repealed although transitional provisions permit a special partnership existing on the commencement of the new Act to continue but not to be renewed at the end of its current 7-year term. 
I thought it would be appropriate to talk about and comment on the development of venture capital in New Zealand. Josh Lerner an expert in venture capital at Harvard Business School suggests that market failures have resulted in Government support being a factor in the initial development of all future venture capital markets. He goes on to identify three potential market failures. First there is a heightened risk of research and development spillover to competitors when small innovative firms have scarce resources to defend their intellectual property. Second the increasing-returns nature of a developing venture capital market with the development of specialised venture capital skills and soft infrastructure involving lawyers accountants and business advisers with deep understanding of venture capital processes means that the 100th investment is considerably easier than the first investment. Third severe information asymmetries between venture capital firms and potential investees lead to the requirement that the size of an investment must be significantly large to justify the considerable due diligence costs involved in making investments. Similar asymmetries apply to young venture capital funds that have yet to develop a track record of success and that therefore have difficulty in securing funds from institutional investors. 
He goes on to say that in this context the Government’s initiative in 2002 of establishing the New Zealand Venture Investment Fund on an arm’s length basis from political interference and as a co-investor with private sector investors should be recognised as having been a catalyst for developing the professional venture capital industry in New Zealand. The scope for further development is considerable. For example the size of the New Zealand venture capital sector would need to increase at least fivefold to approach levels comparable with those of Ireland the United Kingdom and Singapore as a proportion of GDP. 
At a more micro level Lerner suggests that New Zealand’s current venture capital market under-services the New Zealand innovation system both in terms of the quantum of capital available from locally based funds and in terms of the breadth and depth of services provided by venture capital managers. It is likely to take quite some time for our venture capital market to mature into a self-sustaining industry. Because successful investments in start-up companies involve 7 to 10-year cycles the existing New Zealand Venture Investment Fund - supported funds will take several more years to develop successful track records to a point where they can attract funds from the majority of local institution investors which will then signal confidence to attract international institutions. In addition given the risks involved in venture capital it would be surprising if all five existing venture capital funds achieved the level of success necessary to continue in business. New funds will need to be established simply to maintain the venture capital market at its current size and further rounds will be required to grow the market towards international levels as a proportion of GDP. So this bill is very important in order for us to be able to meet what the learned Josh Lerner sees as some of the challenges facing venture capital in New Zealand. 
The limited partnership form will be familiar to overseas investors; it operates in other countries. The proposed structure is likely to be very useful for raising investment capital. Industries that have high start-up costs and/or high research and development budgets have significant upfront losses as a result. Examples would be biotech scientific and technology industries and possibly the film industry; all of those would benefit. The flow-through tax treatment allows losses on start-up to be passed through to investors which would be attractive to many of them. 
The limited partnership form offers protection to professional venture capital investors who will not be jointly and severally liable or responsible for the actions of the other partners. The question is whether this legislation is simply a measure to catch up with overseas practice or whether it learns from experience and positions New Zealand more favourably than close competitors for venture capital especially Australia. Examples could be management buy-outs new business opportunities or an investment option available to limited partnerships. National members will want to ask the following questions at the select committee. Are limited partnerships required to make a specified proportion of investments in New Zealand? And is investment permitted in listed and unlisted companies? 
Some law firms have suggested that thought needs to be given to the following issues. The first is the extent of the safe harbours or activities a limited partner can be involved in without contravening the no-management rule. These are to be contained in regulations which need to be developed well in advance of the enactment of this legislation and we will be looking at this issue particularly closely. Then there is the trigger point for someone becoming a limited partner and availing himself or herself of the protection of limited partner status. The draft bill places the obligation on the general partner to get it right. Another is the extent of the power in insolvency to claw back distributions made to limited partners. The current test applies if the limited partner knew that the limited partnership would not satisfy the solvency test after the distribution and applies for 3 years. Written partnership agreements are compulsory for limited partnerships but there is no test of their quality. There is the issue of the continued confidentiality of the names of investments of limited partners including where the information is contained in annual returns. Finally the passing of all losses through to investors is at the moment limited to the capital contributed by the relevant investor. These are issues that law firms have identified in this bill. They are certainly areas that National members will be looking at closely at the select committee. 
There are other advantages of course for small businesses in that the limited partnership will actually allow businesses to have management buy-outs. It will save them from having to list on the stock exchange where the compliance and reporting procedures can be too tough for some small businesses. So we could see a resurgence of money through private equity going into businesses. In fact the latest annual  
New Zealand Venture Capital Monitor 
 shows private equity investment up 250 percent in 2006 to $1.13 billion. But that is still behind Australia the United States and the United Kingdom. 
We will be looking closely in the select committee at the points I have raised. National supports the bill. It is very good legislation. 
Bill read a first time. 
Hon CLAYTON COSGROVE (Minister for Building and Construction) 
 on behalf of the  
Minister of Commerce 
: I move  
That the Limited Partnerships Bill be referred to the Commerce Committee 
 that the committee finally report back on or before 3 December 2007 and that the committee have the authority to meet at any time while the House is sitting except during questions for oral answer and during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House despite Standing Orders 192 and 195(1)(b) and (c). 
Motion agreed to.