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Income Tax Act 2007

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

HG 5: Disposal of partner’s interests

You could also call this:

“How tax works when selling your share in a partnership”

When you sell some or all of your partner’s interests in a partnership, this law applies if the money you get from the sale is less than the value of those interests minus $50,000.

To figure this out, you need to add up the money you got for selling your current interests and any other interests you sold in the past year. Then, you subtract the value of those interests and any debts related to them.

If you sell your interests, you don’t have to pay tax on the money you get. But you also can’t claim any tax deductions for those interests in the year you sell them or later years.

The person buying your interests can’t claim any tax deductions for the money they pay you. However, after they buy the interests, they’re treated as if they’ve always owned them for tax purposes.

This law doesn’t apply to small partnerships covered by [section HG 3(2)]. Also, [section HG 4] is more important than this one if both apply.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1185064.

Topics:

Money and consumer rights > Taxes

HG 4: Disposal upon final dissolution, or

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

HG 6: Disposal of trading stock, or

“Rules for selling your share in a small business partnership that includes trading stock”

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

HG 5Disposal of partner’s interests

This section applies when a person disposes of some or all of their partner’s interests (the current interests) in a partnership, if the amount calculated using the following formula is less than zero:
$disposal payment + previous payments− (gross tax value − liabilities) − $50,000.$

Where:
In the formula,—
disposal payment is the total amount of consideration paid or payable to the exiting partner for the current interests:
previous payments is the total amount of consideration paid or payable to the exiting partner for other disposals of some or all of their partner’s interests (the other interests) that have occurred in the year before the disposal of the current interests:
gross tax value is the total of—
1. the value under this Act of the current interests and other interests at the time the relevant interest is disposed of, to the extent to which the interests are revenue account property or depreciable property, or financial arrangments:
2. the market value of the current interests and other interests at the time the relevant interest is disposed of, to the extent to which the interests are not revenue account property or depreciable property or financial arrangements:
liabilities is the amount of liabilities under generally accepted accounting practice at the time the relevant interest is disposed of, calculated by reference to the exiting partner’s partnership share for the relevant interest.

The disposal payment described in subsection (2)(a) is excluded income of the exiting partner.
The exiting partner is denied any deduction in relation to the current interests for the income year in which the disposal of the interests occurs and later income years to the extent to which the entering partner is allowed a deduction because of subsection (6).
An entering partner is denied any deduction for the disposal payment described in subsection (2)(a).
For the purposes of calculating the income and deductions of an entering partner for the part of the income year after the disposal of the interests occurs and later income years (the post-disposal periods), the entering partner is treated for the post-disposal periods as if they had originally acquired and held the current interests, not the exiting partner. However, this subsection does not apply to a deduction carried forward under section HG 12.
This section does not apply for the partners of a small partnership if section HG 3(2) applies.
Section HG 4 overrides this section.

Notes

Section HG 5: inserted, on 1 April 2008, by section 19(1) of the Taxation (Limited Partnerships) Act 2008 (2008 No 2).
Section HG 5(1): amended, on 30 March 2017, by section 134(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
Section HG 5(2)(c): substituted (with effect on 1 April 2008), on 6 October 2009, by section 271(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section HG 5(7): amended (with effect on 1 April 2008), on 6 October 2009, by section 271(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section HG 5 list of defined terms depreciable property: inserted (with effect on 1 April 2008), on 6 October 2009, by section 271(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section HG 5 list of defined terms exiting partner: inserted, on 30 March 2017, by section 134(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
Section HG 5 list of defined terms financial arrangement: inserted (with effect on 1 April 2008), on 6 October 2009, by section 271(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section HG 5 list of defined terms revenue account property: inserted (with effect on 1 April 2008), on 6 October 2009, by section 271(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).