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Income Tax Act 2007

Taxation of certain entities - Joint venturers, partners, and partnerships

HG 4: Disposal upon final dissolution

You could also call this:

“Final dissolution of partnerships: tax treatment of partners' interests”

When a partnership ends for good, this law explains what happens with the partners’ interests in the partnership. Here’s what you need to know:

If the partnership is ending and won’t continue, each partner is treated as if they sold all their interests in the partnership to someone else at market value. Then, they’re treated as if they bought those interests back at the same price.

Anything a partner gets when the partnership ends doesn’t count for tax purposes.

This rule doesn’t apply if a partner sells their interests to someone they’re not related to. When checking if they’re related, you don’t count their relationship through the partnership.

There’s a special case for married couples, civil union partners, or de facto partners. If there are only two partners who are in one of these relationships, and the partnership ends because one of them dies or they’re dividing up their property, this rule doesn’t apply. Instead, if all of one partner’s interests go to the other partner, different rules about relationship property or gifts apply.

This rule is more important than some other rules about partnerships.

For limited partnerships, when working out the market value of a partner’s interest in money they owe, you need to think about any changes because of credit problems.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1185062.

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Part H Taxation of certain entities
Joint venturers, partners, and partnerships

HG 4Disposal upon final dissolution

  1. This section applies when a partnership is finally dissolved by agreement of the partners, court order, or otherwise, and the partnership's business ignoring section HG 2 will not continue to be carried on in partnership.

  2. A partner of the partnership is treated as disposing of all of their partner's interests in the partnership, immediately before the dissolution, to a single third party for a payment equal to the interests' market value. The partner is treated as re-acquiring all of their partner's interests immediately after the dissolution, from the third party for a payment equal to the interests' market value.

  3. Anything received by a partner in relation to the final dissolution of the partnership is ignored.

  4. This section does not apply to the extent to which a partner of the partnership disposes of their partner's interests in the partnership to persons who are not associated with them. For the purposes of testing association, the partner's partnership capacity is ignored.

  5. This section does not apply if—

  6. immediately before the dissolution, there are only 2 partners of the partnership and they are married to each other, in a civil union together, or in a de facto relationship together; and
    1. the dissolution is caused by death of a partner, or the dissolution relates to the settlement of relationship property; and
      1. on dissolution, all partner's interests of 1 person are transferred, ignoring any intervening transfer to an executor or administrator, to the other person; and
        1. the transfers of those partner's interests are subject to provisions in subpart FB or FC (which relate to transfers of relationship property and gifts), and those provisions treat the transfers as disposals for amounts that are not the interests' market values.

          1. This section overrides sections HG 5 to HG 10.

          2. In this section, in relation to a limited partnership, the market value of a partner’s interest in a financial arrangement as debtor must take into account the amount of any adjustment for credit impairment.

          Notes
          • Section HG 4: substituted (with effect on 1 April 2008), on , by section 270(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
          • Section HG 4(4): amended (with effect on 1 April 2008), on , by section 100(1) (and see section 100(2) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
          • Section HG 4(7) heading: inserted, on (with effect on 1 April 2011 and applying for income years beginning on or after that date), by section 122(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
          • Section HG 4(7): inserted, on (with effect on 1 April 2011 and applying for income years beginning on or after that date), by section 122(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
          • Section HG 4 list of defined terms financial arrangement: inserted, on (with effect on 1 April 2011), by section 122(2) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).