Proposed tax changes for limited partnerships

New rules on limited partnerships have been proposed to attract more venture capital investment into New Zealand.

The New Zealand Government has proposed new limited partnership rules, with separate legal entity status and partnership tax treatment, to encourage venture capital investment into New Zealand.

Limited partnerships are an internationally preferred vehicle for investment into a foreign country for the following main reasons:

• they allow investors to limit their exposure to liability to the amount of their investment; and
  
  
• they provide a flow-through tax mechanism in respect of gains and losses.

New Zealand currently has special partnership rules in place. However, the rules are recognised as being outdated and restrictive. Of particular concern is that the absence of separate legal personality could render a partner personally liable. The proposed rules will recognise a limited partnership as a separate legal entity.

The new rules will apply to a raft of business activities operating in partnership form, including:

• small, closely-held businesses;
  
  
• small, medium and large professional practices;
  
  
• small investment activities;
  
  
• widely-held investment activities; and
  
  
• all sectors, including agriculture, forestry and manufacturing.

Proposed rules for limited partnerships include the introduction of loss limitation rules to ensure that net losses claimed by a limited partner reflect the actual level of that partner's economic loss.

A Bill is expected to be introduced into Parliament next year, with application from the 2008/2009 income year.

Enquiries and information

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