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HZ 4: Overseas limited partnerships: transition into limited partnerships deduction rules
or “Rules for tax deductions when overseas partnerships become limited partnerships”
You could also call this:

“How qualifying companies can become partnerships for tax purposes”

This section explains how a qualifying company can change into a partnership. You can do this in the first or second income year starting on or after 1 April 2011. Here’s what happens:

From the first day of that year, the partnership is treated as if it already exists. It has all the assets, debts, rights, and duties of the qualifying company. The qualifying company is ignored for tax purposes from this point on.

When the assets, debts, rights, and duties move to the partnership, it’s treated in a special way for tax purposes. The partnership takes over the tax situation of the qualifying company. This means the partnership is treated as if it always had the same tax history as the company.

The qualifying company loses its tax situation when this happens. Any tax accounting amounts it had before are ignored.

If the partnership is a limited partnership, the partners must choose how to calculate their share of the partnership. They can either use the market value or book value of their shares at the end of the year before the change, or they can pretend the company was always a partnership.

To make this change, you must tell the tax department within 6 months of the start of the year you’re making the change. The partners must be the same people who owned shares in the company before the change. All assets and debts must move to the partnership, except those that don’t fit with being a partnership. Each partner must end up with the same share in the partnership as they would have if the company had closed down.

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Next up: HZ 4C: Qualifying companies: transition into look-through companies

or “Rules for qualifying companies becoming look-through companies”
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Part H Taxation of certain entities
Terminating provisions

HZ 4BQualifying companies: transition into partnership

  1. This section applies when a QCP transitional process is carried out for a qualifying company or companies for the first or second income year that starts on or after 1 April 2011, whichever is relevant (the transitional income year).

  2. From the first day of the transitional income year to the first day of existence for the partnership that effectively replaces the qualifying company or companies under a QCP transitional process, the partnership is treated as existing and having the assets and liabilities of the qualifying company or companies, and associated rights and obligations, for that period. On and after the first day of the transitional year, the existence of the qualifying company or companies is ignored for the purposes of the Inland Revenue Acts except to the extent necessary to give effect to this section.

  3. The moving to the partnership of the assets, liabilities, and associated rights and obligations, under a QCP transitional process is treated for the purposes of the Inland Revenue Acts as a unique form of transference for such assets, liabilities, rights, and obligations, with the following effects:

  4. the moving to the partnership of the assets, liabilities, and associated legal rights and obligations, is treated as not being a transfer of such assets, liabilities, rights, and obligations:
    1. the qualifying company or companies has, before the first day of the transitional income year, the relevant tax situation in relation to the assets and liabilities, and associated rights and obligations (the historical tax situations):
      1. the partnership is treated as stepping into the place of the qualifying company or companies, and as having, on and after the first day of the transitional income year,—
        1. the qualifying company's or companies' historical tax situations; and
          1. the tax situation in relation to the assets and liabilities, and associated rights and obligations, that it would have if it had always had the historical tax situations:
          2. the qualifying company has no tax situation in relation to the assets and liabilities, and associated rights and obligations, on and after the first day of the transitional income year:
            1. all memorandum account balances and other tax accounting amounts for the qualifying company before the first day of the transitional income year are ignored and have no effect on and after that day (for example, the qualifying company has no effective ASC on and after the first day of the transitional income year).

              1. Subsections (2) and (3) are applied immediately before section HG 2 (Partnerships are transparent) applies.

              2. For the purposes of applying sections HG 11 and HG 12 (which relate to limited partnership deduction rules) to the partners of a limited partnership described in subsection (2) for the transitional income year and later years, all of the partners must choose 1 of the 2 following methods for calculating their partner's basis under section HG 11(3):

              3. for calculating amounts under section HG 11(5)(a) for shares that were held at the end of the income year (the last year) before the transitional income year, they may choose to use the market value or the accounting book value of those shares as at the end of the last year. Calculations under section HG 11(7)(b) and (8)(b) are changed to account for the valuation under this paragraph; or
                1. they may choose to apply section HG 11(3) as if the qualifying company had always been a limited partnership and all relevant rules relating to limited partnerships had always existed, applying those rules with any necessary modifications.

                  1. If the application of sections HG 11 and HG 12, as modified by this section, calculates a partner's basis as less than zero, then the partner's basis is treated as being zero.

                  2. QCP transitional process means a process, for which all outcomes are achieved in an income year (the transitional income year), by which a company or companies that are all qualifying companies at the end of the income year before the transitional income year transform into a partnership. The process must have the following outcomes:

                  3. the Commissioner receives a notice from the qualifying company or companies before the day that is 6 months after the start of the transitional income year, stating an intention to revoke the company's or companies' qualifying company status and to complete the QCP transitional process relating to the partnership for the transitional income year; and
                    1. the partners, or in the case of a limited partnership, the partners other than a company that is a general partner, are the same persons who, at the end of the income year before the transitional income year, were the shareholders of the qualifying company or companies, ignoring any person who dies in the transitional year; and
                      1. all assets and liabilities, and associated rights and obligations, of the qualifying companies are moved to the partnership, excluding those that are inappropriate for a partnership; and
                        1. each partner must have the same net position in the partnership as to relevant assets and liabilities, and associated rights and obligations, as would arise on the winding up of the qualifying company or companies at the end of the income year before the transitional income year, treating any person who dies in the transitional year as still being a partner.

                          Notes
                          • Section HZ 4B: inserted, on (applying for income years beginning on or after 1 April 2011), by section 104(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                          • Section HZ 4B(3)(b): amended, on , by section 195(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B(3)(b): amended, on , by section 195(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B(3)(c)(i): amended, on , by section 195(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B(3)(c)(ii): amended, on , by section 195(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B(3)(c)(ii): amended, on , by section 195(5) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B(3)(d): amended, on , by section 195(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B(5): amended (with effect on 1 April 2011), on , by section 111(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                          • Section HZ 4B(5)(a): replaced (with effect on 1 April 2011), on , by section 111(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                          • Section HZ 4B list of defined terms notice: inserted, on , by section 74 of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                          • Section HZ 4B list of defined terms tax position: repealed, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                          • Section HZ 4B list of defined terms tax situation: inserted, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).