New Zealand To Target Venture Capital With New Tax Proposals

by Mary Swire, Tax-News.com, New Zealand

29 June 2006

The New Zealand government has released a discussion paper which proposes codifying the tax rules on general partnerships and introducing new rules on limited partnerships.

According to the government, the changes are designed to bring clarity and certainty to New Zealand’s tax rules on partnership income and bring them into line with international best practice.

“A key impetus of the tax reform for limited partnerships is the planned introduction of modern limited partnership regulatory rules, to be the subject of a future bill," commented Finance Minister Michael Cullen and Revenue Minister Peter Dunne in a statement.

“Limited partnerships are an internationally preferred vehicle for venture capital investment into foreign countries. Given the importance of attracting venture capital into New Zealand, it makes sense to have tax rules that facilitate this kind of investment by recognising the separate legal entity status of limited partnerships, while ensuring flow-through treatment for tax purposes," the ministers added.

The intention behind the new rules is to provide greater certainty for all partnerships and to enable New Zealand to be more competitive with Australia in attracting venture capital.

The main proposals are:

All partnerships

• Partners will derive income or expenses from each source, in proportion to their profit share (flow-through treatment).
• The entry and exit of partners will not result in the dissolution of the partnership for income tax purposes.
• Exiting partners may recognise gains or losses attributable to underlying partnership assets on disposition subject to a minimum threshold rule. The minimum threshold simplifies tax consequences for exiting or new partners when tax is not an issue.
• New rules will reduce the likelihood of under-taxation and over-taxation of both exiting and incoming partners.

Limited partnerships

• New rules will allow the same flow-through tax treatment for limited partnerships that have separate legal entity status.
• New loss limitation rules will ensure the tax losses deducted by limited partners reflect the actual level of any economic loss.
• A simple transition from a special partnership to a limited partnership would not generally result in the triggering of income tax provisions for the partners.

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