HG 11 Limitation on deductions by partners in limited partnerships
When this section applies

(1)

This section applies for a limited partnership and an income year when, but for this section, a deduction by virtue of section HG 2 or HG 12 is allowed to—

(a)

a limited partner of the limited partnership:

(b)

a general partner of the partnership who—

(i)

was a limited partner of the limited partnership within 60 days of the last day of the income year; and

(ii)

is or will be a limited partner of the limited partnership within 60 days after the last day of the income year.

No deduction

(2)

The partner is denied the deduction for an income year to the extent to which their limited partnership deduction for the income year is greater than the amount (the partner’s basis) calculated using the formula in subsection (3) on the last day of the income year.

Partner’s basis

(3)

For the purposes of subsection (2), the amount that is the partner’s basis is calculated using the following formula:

investments − distributions + income − deductions − disallowed amount.

Definition of items in formula

(4)

The items in the formula are defined in subsections (5) to (9).

Investments

(5)

Investments is the total of—

(a)

the market value of capital contributions made by the partner to the limited partnership at the time the relevant contribution is contributed or agreed to be contributed by them:

(b)

the amount paid by the partner for the assignment of capital contributions to them:

(c)

the secured amounts.

Distributions

(6)

Distributions is the total of—

(a)

the market value of distributions to the partner from the limited partnership:

(b)

the amount paid to the partner for the assignment of capital contributions by them.

Income

(7)

Income is the total of—

(a)

income that the partner has by virtue of section HG 2 in the income year and previous income years:

(ab)

if the partner has FIF income or a FIF loss, an amount under subsection (7B):

(b)

capital gain amounts under section CD 44(7)(a) (Available capital distribution amount) that the partner would have by virtue of section HG 2 in the income year and previous income years, if the partner were treated as a company for the purposes of section CD 44(7)(a), unless the gain is accounted for under paragraph (a):

(c)

assessable income that the partner has in previous income years from goods and services they contributed to the limited partnership, if the income is not accounted for under subsection (5) or paragraph (a) or (b) of this subsection.

Formula

(7B)

The amount described in subsection (7)(ab) is given by the following formula, but if the calculation returns a negative number, the amount is zero:

dividend − FIF amount.

Definition of items in formula

(7C)

In the formula,—

(a)

dividend is the amount that would be the partner’s share of the dividend paid by a FIF to the limited partnership, if section CD 36(1) (Foreign investment fund income) were ignored:

(b)

FIF amount is—

(i)

zero, if subparagraph (ii) does not apply:

(ii)

the amount that is the person’s FIF income, for the relevant income year and FIF, if the person has such an amount.

Deductions

(8)

Deductions is the total of—

(a)

expenditure or loss in previous income years, to the extent to which the expenditure or loss is incurred by virtue of section HG 2 in the partner deriving income by virtue of section HG 2, excluding any deductions denied in those previous years under this section:

(b)

capital loss amounts under section CD 44(9) that the partner would have by virtue of section HG 2 in the income year and previous income years, if the partner is treated as a company for the purposes of section CD 44(9), unless the loss is accounted for under paragraph (a):

(c)

deductions that the partner is allowed in previous income year in relation to assessable income described in subsection (7)(c), if the deduction is not accounted for under paragraph (a) or (b) or subsection (6).

Disallowed amounts

(9)

Disallowed amount is the amount of investments, as defined in subsection (5), made by the partner within 60 days of the last day of the income year, if those investments are or will be distributed or reduced within 60 days after the last day of the income year.

Exclusion

(10)

This section does not deny a partner a deduction that is equal to or less than the amount of net income that the exiting partner has for the amount paid or payable to the exiting partner for the disposal of their partner’s interests, ignoring other transactions.

Relationship with subject matter

(11)

This section is modified by sections HZ 3, HZ 4, and HZ 4B (which relate to transitions to limited partnerships).

Some definitions

(12)

In this section,—

capital contribution includes—

(a)

a capital contribution for the purposes of the Limited Partnerships Act 2008:

(b)

amounts that the limited partnership is debtor for in relation to the partner, including a loan to the limited partnership and a credit balance in a current account

guarantor means—

(a)

a partner, if—

(i)

the partner secures the relevant debt by guarantee or indemnity:

(ii)

the partner’s associate secures the relevant debt by guarantee or indemnity:

(b)

a person who is not described in paragraph (a)(i) and (ii) but who secures the relevant debt by guarantee or indemnity, if the partner or a partner’s associate also secures the relevant debt as described in paragraph (a)(i) or (ii)

limited partnership deduction means, for the partner and the income year, the amount of any deductions that the partner would be allowed if the partner is treated as having no income or deductions other than those that arise by virtue of sections HG 2 and HG 12

partner’s associate means, for a partner, a person who is not a partner of the relevant limited partnership, and who is—

(a)

a relative of the partner, but excluding a person under section YA 1 (Definitions), definition of relative, paragraph (v):

(b)

a company in the same wholly-owned group as the partner

recourse property means property to which a creditor has recourse, to enforce a guarantee or indemnity for the relevant debt, if the guarantee or indemnity expressly provides recourse to only that property

secured amounts means, for the partner, the lesser of the following applicable amounts—

(a)

the amount of the limited partnership’s debt ignoring section HG 2 (the secured debt) for which the partner is a guarantor, divided by the total number of guarantors for the secured debt:

(b)

the market value of the recourse property for the secured debt to the extent of the interest that the partner and the partner’s associates have in it, net of higher-ranking calls whether actual, future, or contingent, divided by the total number of guarantors described in the definition of guarantor, paragraph (a), who have an interest in the recourse property or have a partner’s associate with an interest in the recourse property.

Defined in this Act: amount, capital contribution, deduction, dividends, entering partner, exiting partner, FIF, FIF income, FIF loss, guarantor, income, income year, limited partnership deduction, loan, net income, net loss, partner, partner’s associate, partnership, recourse property, secured amounts

Section HG 11: inserted, on 1 April 2008, by section 19(1) of the Taxation (Limited Partnerships) Act 2008 (2008 No 2).

Section HG 11(7)(a): replaced (with effect on 1 April 2008), on 2 November 2012, by section 85(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(7)(ab): inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(7B) heading: inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(7B): inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(7C) heading: inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(7C): inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(8)(b): amended (with effect on 1 April 2008), on 6 October 2009, by section 277 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).

Section HG 11(8)(c): amended, on 30 March 2017, by section 139(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section HG 11(10): amended, on 30 March 2017, by section 139(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section HG 11(11): amended, on 1 April 2011 (applying for income years beginning on or after 1 April 2011), by section 81(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).

Section HG 11(12) capital contribution: replaced (with effect on 1 April 2008), on 2 November 2012, by section 85(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(12) guarantor: inserted (with effect on 1 April 2012), on 2 November 2012, by section 85(4) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(12) partner’s associate paragraph (a): amended (with effect on 1 April 2012), on 2 November 2012, by section 85(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(12) resource property: inserted (with effect on 1 April 2012), on 2 November 2012, by section 85(6) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11(12) secured amounts: replaced (with effect on 1 April 2012), on 2 November 2012, by section 85(6) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11 list of defined terms exiting partner: inserted, on 30 March 2017, by section 139(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section HG 11 list of defined terms FIF loss: inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(7) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11 list of defined terms guarantor: inserted (with effect on 1 April 2012), on 2 November 2012, by section 85(8) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11 list of defined terms loan: inserted (with effect on 1 April 2008), on 2 November 2012, by section 85(9) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11 list of defined terms recourse property: inserted (with effect on 1 April 2012), on 2 November 2012, by section 85(8) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).

Section HG 11 list of defined terms secured amounts: inserted (with effect on 1 April 2012), on 2 November 2012, by section 85(8) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).