Partnership tests

Issue: Scope of partnership and partner test

Submission

(15 – WHK Taylors, 68A Corporate Taxpayers Group)

A partner and a partnership should not be associated in all circumstances. Instead, they should be associated only if a partner has a 25 percent or greater share in the partnership.

Comment

Since the enactment in 1968 of the first associated persons definition in the Income Tax Act, a partner and their partnership have always been associated regardless of the share a partner has in the partnership. It has not been part of the reform proposals to change this long-standing position.

Officials consider that it is appropriate to always associate a partner and their partnership given the transparent treatment of partnerships for income tax purposes, which involves attributing any activity of a partnership to its partners.

A separate associated persons rule is being implemented for limited partnerships. A limited partnership and a limited partner will only be associated if the limited partner has a partnership share of 25 percent or more in the limited partnership. The treatment is appropriate because a limited partner cannot be involved in the management of the partnership (unlike a partner in a general partnership). Therefore, a limited partner is more akin to a shareholder in a company which has a 25 percent interest threshold for association under section YB 3.

Recommendation

That the submission be declined.

Issue: Scope of partnership and associate of partner test

Submission

(1 – Bell Gully, 15 – WHK Taylors, 35 – PricewaterhouseCoopers, 53 – Ernst & Young, 57 – Tomlinson Paull, 62 – Minter Ellison Rudd Watts, 68A – Corporate Taxpayers Group)

The partnership association tests in sections YB 12 and YB 13, in conjunction with the tripartite test, creates the apparently unintended consequence that a partner will be associated with the associates of the other partners in the partnership.

It is also considered that a partnership and an associate of a partner are too remote to be associated in all circumstances.

Comment

Officials agree that it is not intended to associate a partner with the associates of other partners in the same partnership. This issue is best addressed by omitting section YB 13, which associates a partner’s associates with the partnership.

It is noted that an associate of a partner (for example, the spouse of a partner) would still be associated with the partnership under the tripartite test, which associates two persons if they are each associated with the same third person. For example, the spouse of a partner is associated with the partner under the relatives test in section YB 4. The partner is associated with the partnership under section YB 12. Therefore, the spouse and the partnership will be associated under the tripartite test in section YB 14.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Amendments to partnership and partner test

Submission

(Matter raised by officials)

The test for association for a limited partnership in section YB 12(2) should be amended so it applies only to a limited partner and not a general partner in a limited partnership.

An aggregation rule should also apply for the purposes of section YB 12(2).

Comment

Currently, section YB 12(2) switches off the primary test for associating a partnership and a partner in subsection (1) in relation to limited partnerships. However, this exclusion should be limited to the limited partners and not the general partner in a limited partnership. This limitation would be consistent with the current section YB 16(1B). This would also mean that a general partner in a limited partnership will be associated with the partnership under section YB 12(1).

Under section YB 12(2), a limited partnership and a limited partner will only be associated if the limited partner has a partnership share of 25 percent or more in the limited partnership. This approach has been adopted because a limited partner is more akin to a shareholder in a company which has a 25 percent interest threshold for association under section YB 3. It would be consistent with this approach for an aggregation rule such as that contained in section YB 3(4) to also apply for the purposes of the limited partnership test in section YB 12(2). This test would ensure that for the purposes of determining whether a limited partner and a limited partnership are associated, a person is treated as holding anything held by their associates.

Recommendation

That the submission be accepted.

Issue: Ambiguity in limited partnership tests

Submissions

(33 – Investment Savings and Insurance Association of NZ Inc, 35 – PricewaterhouseCoopers, 68A – Corporate Taxpayers Group, 67 – New Zealand Institute of Chartered Accountants)

The proposed sections YB 12 and YB 13 should be amended to clarify whether and if so, in what circumstances a general partner or a person associated with a general partner is associated with a limited partnership.

For general partners who do not economically share in the profits or losses of a limited partnership, the legislation should be clarified so that they are not associated. Alternatively, a general partner should be associated with a limited partnership only if they have a 25 percent or more interest in that partnership.

The test associating a partnership and an associate of a partner in section YB 13 should be amended to achieve its intended outcome.

The limited partnership tests in sections YB 12(2) and YB 13(2) should include a discretion for the Commissioner to disregard any partnership share of 25 percent or more where the share in the limited partnership held by the limited partner corresponds to control or influence of less than 25 percent.

Section HG 2 of the Income Tax Act 2007 which provides that partnerships are transparent should be made consistent with new section YB 12 which only associates a limited partner who has a 25 percent or more interest in a limited partnership.

Comment

The drafting issue of whether a general partner is associated with a limited partnership has been addressed under the previous heading “Amendments to partnership and partner test”. Officials consider that because a partner in a general partnership is always associated, the general partner in a limited partnership should also always be associated with the partnership.

The submission relating to the wording in section YB 13 is superseded by the recommendation to omit this provision.

Officials consider that the submission to insert a discretion in the limited partnership associated persons test would introduce a subjective element which would not be desirable. It would also lead to the application of the test being uncertain.

We do not consider it necessary to amend section HG 2 of the Income Tax Act 2007 in relation to limited partnerships, given the specific nature of section YB 12 which only associates limited partners who have a 25 percent or more interest in a limited partnership.

Recommendation

That it be noted that the submissions relating to the drafting of the limited partnership tests in proposed sections YB 12 and YB 13 have been addressed under previous headings.

That the submission to amend section HG 2 of the Income Tax Act 2007 be declined.