Worth Richard: Limited Partnerships Bill — First Reading 
Worth Richard: Limited Partnerships Bill — First Reading 
[Volume:641;Page:11316] 
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.