IRD confirms its view that partnership contributions are taxable events

Tuesday 5 December 2017

Authors: Graham Murray and Catherine Bunting

​​​The IRD has released its final statement on whether the contribution of an asset to a partnership represents a full or partial disposal of that asset for tax purposes. The statement confirms the IRD's view that a full disposal arises, which is in contrast to the partial disposal approach that many taxpayers have adopted. 

Conseque​nces of the IRD’s view                    

The full disposal interpretation means that the contributing partner will need to calculate the tax effects of a contribution as if they had sold the entire asset to a third party. This will apply even if they continue to have an interest in the asset through the partnership. The IRD's statement applies to both general partnerships and limited partnerships. 

Uncertain treatment​

At the heart of the issue was how section HG 2 of the Income Tax Act 2007 should be interpreted. That provision contains a "transparency rule" which deems a partner to hold partnership property in proportion to their partnership share and the partnership to not hold that property. 

This provision had been taken by many to mean that a taxpayer who contributes property to a partnership only disposes of the portion of that asset that becomes deemed property of the other partners. For example, if a partner contributes an asset to a partnership for a 70 per cent partnership interest, the partner only disposes of 30 per cent of the asset for income tax purposes.

The IRD has now rejected this interpretation, suggesting that the transparency rule applies only after the partner has contributed their property to the partnership. The IRD takes the view that when assets are contributed to a partnership, the partner makes that contribution in their personal capacity with the result that the "partnership transparency" rule in section HG 2 does not yet operate. 


The IRD's interpretation has come as a surprise to many taxpayers and advisors, who had adopted a partial disposal approach based on the apparent intention of the partnership tax rules to treat partnerships as "transparent".

As the IRD has previously accepted both the partial and full disposal approaches to capital contributions of assets, relief will be provided for contributions already made. The IRD will permit a person who has, before 29 November 2017, applied the partial disposal approach to continue to apply that approach, provided that:

  • the approach is reflected in the person's accounts for each year until the asset has been disposed of by the partnership, and
  • the person pays any applicable tax on the retained part of the asset when the partnership disposes of the asset.

Contributions of assets made after 29 November 2017 must use the full disposal approach. This will increase the tax cost of contributing property to a partnership going forward. 

If you or your business has any questions regarding any of the issues raised in our article, please contact one of our team or your usual Bell Gully adviser.


This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Graham Murray

    Partner Auckland
  • Mathew McKay

    Partner Auckland
  • Willy Sussman

    Partner Auckland
Related areas of expertise
  • Tax