Limited partnerships are becoming an increasingly popular choice for Maori joint venture arrangements. So what is behind this trend?
Limited partnerships are a type of legal entity with a general partner, which is responsible for the management of the partnerships, and one or more limited partners. Depending on the nature of the investment vehicle, the general partner may be a company with the limited partners as shareholders.
Unlike ‘traditional’ partnerships, limited partnerships have separate legal personality, which means that the liability of the limited partners is limited to the level of their capital contributions to the partnership. It also means that the limited partnership holds property in its own name, avoiding the hassle of property transfers every time a partner exits or enters the partnership.
A major part of the rationale behind the introduction of the limited partnership structure in 2008 was developing of New Zealand’s venture capital industry, given that these vehicles are well-recognised by overseas investors. For a Maori joint venture looking to attract offshore capital investment, this can be a major plus.
The other major drawcard for limited partnerships is that while they have separate personality, the limited partners can derive the tax benefits of a partnership. This means that profits and losses ‘flow through’ to the limited partners. This can be particularly attractive for Maori land trusts taxed at the lower Maori Authority rate. It can also be advantageous for new agribusiness ventures where losses are expected in the first few years, as these losses can flow through to the limited partners.
Together with this is the flexibility that the structure offers to the partners. Beyond the minimum requirements for the set of rules governing the partnership, the parties have relative freedom to set the commercial terms of their arrangement. This can be in contrast with the more prescriptive rules governing Maori entities constituted under Te Ture Whenua Maori Act. Details of limited partners are also kept confidential, which parties may find attractive.
A further benefit is that while limited partners must not get involved in management if they wish to keep their limited liability, they are able to participate in certain ‘safe harbour’ activities. These include the ability to veto any proposed ‘major’ investments. This helps to protect a degree of the individual partners’ rangatiratanga in the relationship.
Limited partnerships also have some advantages over look-through companies (LTCs), as LTCs are limited to five shareholders only. Further, potential tax reforms may remove the ability for Maori authorities and charities to hold shares in an LTC. This means that Maori authorities will not be able to operate a separate business arm as an LTC which is taxed at the lower Maori authority rate of 17.5%.
The major potential fishhooks with limited partnerships come in the limitations to their tax advantages.
The most often-cited limitation is the partners’ basis rule. This requires that the losses from the partnership available to offset a partners’ income from other sources is capped at the value of their investment in the partnership. If Maori land trusts, for example, are putting low-value properties into the partnership with the intention of attracting outside investment, they may find their tax advantages are limited.
Other fishhooks that need to be borne in mind are the tax position of partners entering or exiting the partnership, and the position of the partners on dissolution. Under ‘safe harbour’ rules, parties entering the partnership can, in certain circumstances, inherit the cost base of the exiting partner for depreciable property, revenue account property and financial arrangements. This is usually advantageous for exiting partners from a tax point of view, but effectively passes their tax burden onto the entering partner, usually resulting in a price adjustment for the partnership interest being sold.
Further, there are no safe harbour rules applying when the partnership is finally dissolved. For tax purposes, each partner will be treated as disposing of their share of the partnership assets to a single third party purchaser and reacquiring those interests at market value. Partners starting up or entering limited partnerships therefore need to think carefully about how long the partnership is likely to endure, and what tax legacy they may be leaving their mokopuna.