As iwi move through their Waitangi Tribunal claims process to a settlement, the next question for many is how to manage settlement assets in the best interests of beneficiaries – both immediately and in the longer term. A post-settlement governance entity’s structure will depend on several factors, but there are few common vehicles that we see across the board which can be tailored to an iwi’s particular values and considerations. Limited partnerships are often set up to manage commercial activities.
Limited Partnerships v Companies
If a PSGE intends to take on any major particular commercial project or investment, either by itself or with third parties, we generally recommend that a new entity (i.e. separate from the PSGE) is established to protect the PSGE’s assets from any associated risk. These new entities generally fall under two types: companies or limited partnerships. Companies are simpler structures and can be easier to set up; however they may be less advantageous from a tax perspective.
Under current tax law, entities deemed to be “Māori authorities” can take advantage of a lower income tax rate of 17.5% (compared to the corporate tax rate of 28%). While PSGEs can benefit from this lower rate on income earned directly by the PSGE, a current “loophole” in the law means that a subsidiary company, even if it is wholly owned by a Māori authority, is not itself deemed to be a Māori authority and will consequently be taxed at the full corporate rate. As a result the PSGE may end up with unusable imputation credits on dividends.
However, limited partnerships tax income on a “flow-through basis”, whereby each limited partner gets taxed at its own rate on distributions of income earned by the partnership. For that reason, a limited partnership is usually the vehicle we will recommend to a PSGE looking to establish or expand its commercial activities.
This flow-through arrangement also makes limited partnerships an ideal vehicle for joint venture arrangements, where a PSGE partners with third parties (including private companies, charitable trusts or government entities) to undertake commercial activities – as each partner can be taxed at their own applicable rate.
Structure
A limited partnership is a separate legal entity, comprised of
- A general partner, which can be an individual, a company or some other entity. The general partner is responsible for the day-to-day management of the partnership’s business. A general partner will often be set up as a new entity specifically to act in this capacity.
- One or more limited partners. These are equivalent to a company’s shareholders, being the parties contributing capital and receiving distributions of income. The PSGE would be a limited partner, either alone or with joint venture parties.
Risk and Liability
In addition to their tax advantages, running commercial activities through a limited partnership also provides a level of protection for assets remaining in the PSGE trust from commercial risk via limited liability (similar to a traditional company). Unless assets are actually transferred to the ownership of the limited partnership, they are not part of the property of the limited partnership and will not be put at risk by the limited partnership’s activities.
However PSGEs using limited partnerships to manage risk do need to be vigilant to ensure they are not taking part in the management of the limited partnership – this must be done separately by the general partner. If the PSGE undertakes management activities itself, that limitation of liability is lost and the PSGE could end up bearing the responsibility for all of the limited partnership’s debts and liabilities.
Limited partnerships are a common vehicle used to help PSGEs best utilise their settlement assets for the benefit of iwi both short- and long-term. However the exact structure appropriate for your PSGE will depend on your particular values and considerations, and should be discussed with your lawyer in the first instance.
Jessica Middleton is a Senior Associate in our Commercial Team and can be contacted on 07 958 7436.
