Parker David: Limited Partnerships Bill — First Reading 
Parker David: Limited Partnerships Bill — First Reading 
[Volume:641;Page:11323] 
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.