NEW ZEALAND Law and Practice Contributed by: Greg Neill, Fred Ward and Callum Burnett, Russell McVeagh
Look-Through Companies A look-through company (LTC) is a standard New Zea - land company that has elected to be fiscally transpar - ent for income tax purposes. Accordingly, while an LTC is a separate legal entity, for income tax purpos - es it is treated more like a partnership and is fiscally transparent. This enables a small business to trade with limited liability but to have profits and losses taxed directly to the owners. Income tax transparency means that the company’s shareholders must pay tax on the LTC’s profits directly, but similarly can offset the LTC’s expenses or losses against their other income. Because of this favour - able tax treatment, a company can only elect to be an LTC if, amongst other things, it has no more than five shareholders, who must be either natural persons, trustees or other LTCs. 1.2 Use and Taxation of Transparent Business Structures The three types of transparent entities commonly used in New Zealand business are: • general partnerships; • limited partnerships; and • LTCs. General partnerships are a key type of transparent entity commonly used for certain businesses in New Zealand. The transparent nature allows for income to be taxed in accordance with each partner’s own tax profile and allows tax attributes (income, expenditure, credits, etc) to flow directly to the partners rather than being trapped at a corporate level. General partner - ships are commonly used by professional services firms and in the agriculture and horticulture industries. Limited partnerships are frequently used in New Zealand in a commercial context, particularly for co- investment arrangements (including private equity) and for development or infrastructure projects that possess a significant element of risk and are capital intensive. This is primarily because the limited part - nership structure limits investors’ liability but is fis - cally transparent for income tax purposes. This largely enables investors or limited partners to attend to their
limited liability company may also be a general part - ner). Each general partner is jointly and severally liable with the limited partnership itself and the other gen - eral partners for any unpaid liabilities of the limited partnership. A limited partner of a limited partnership generally is not liable for the unpaid liabilities of the limited part - nership, provided that the partner does not take part in the management of the limited partnership. An entity treated as a partnership (general or limited) is not taxed as a separate legal entity. Instead, partner - ships are fiscally transparent for New Zealand income tax purposes. Certain non-New Zealand partnerships with corporate characteristics may be treated as com - panies from a New Zealand perspective, depending on the relevant features of such an entity. While transparent for income tax purposes, a limited partnership is legally a separate entity from its limited partners. It is therefore often an attractive business or investment vehicle from a commercial perspective, given the dual benefit of limited liability for investors and income tax transparency. From a tax perspec - tive, a limited partnership allows investors to attend to their own tax position and provides a favourable option for investors with special tax characteristics (such as non-residents or entities taxed at a rate low - er than the 28% company rate). Limited partnerships also facilitate access to tax losses for investors that might otherwise be “trapped” in a corporate structure. It should be noted that partnerships are not fiscally transparent for New Zealand goods and services tax (GST) purposes. Sole Proprietorships A sole proprietorship is a business operated by an individual in their own legal capacity. As a sole pro - prietorship is not a separate legal entity, the owner has unlimited liability and is therefore personally liable for all debts of the business. This also means that any income derived by the sole proprietorship will be taxed in the hands of the proprietor in accordance with their marginal individual tax rate.
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