A regular client recently arrived concerned. She and two colleagues had co-developed a residential property—each contributing funds, sharing costs, and agreeing to split the profits. But there was no formal agreement. “We never signed anything,” she said. “How could it be a partnership?” Her accountant’s response: “It doesn’t matter if you signed or not. Inland Revenue might still see it as one.”

That exchange illustrates why Inland Revenue’s Interpretation Statement IS 25/11 – Income tax: Taxation of partnerships is both timely and necessary. Issued in April 2025, the statement sets out the Commissioner’s interpretation of how New Zealand’s income tax rules apply to both general and limited partnerships under the Income Tax Act 2007. The interpretation statement was developed following requests from CA ANZ for clearer, consolidated guidance, mirroring the role that Inland Revenue’s trust statements have played for trustees and advisers. While many principles it covers reflect existing law, IS 25/11 brings together earlier commentary and offers clear direction on interpretive questions, particularly around when a partnership exists and how it is taxed.

The statement affirms that partnerships are treated as tax-transparent. This means the partnership itself is not taxed. Instead, income, expenses, and tax attributes flow through to the partners, who each return their share individually. This remains true whether the partnership is formalised or not. What matters is the economic reality of carrying on a business in common with a view to profit.

This has a practical implication: partnerships cannot carry forward tax losses. Any loss is attributed to the partners in proportion to their interests and may only be used by each partner to offset their own income, subject to specific rules, particularly for limited partners.

The statement also confirms that limited partnerships are subject to special treatment. While they remain transparent, limited partners are constrained by loss limitation rules that restrict deductions to the extent of their “at-risk” investment. This prevents tax losses from flowing to passive investors beyond the level of their actual economic exposure—an important safeguard against tax base erosion.

Another key clarification is how Inland Revenue defines a “partnership” for tax purposes. The tax definition doesn’t require a formal registration or written agreement. If two or more parties carry on a business in common with a view to profit, a partnership may be deemed to exist. This is particularly relevant for practitioners advising clients engaged in property development, syndicates, or arrangements that may be described as joint ventures but have the characteristics of a partnership. It is important to note that an arrangement cannot be both a joint venture and a partnership: the correct classification depends on its substance.

However, the transparency rule is not without limits. IS 25/11 recognises that certain statutory or contextual settings may require a different treatment. For instance, look-through companies (LTCs) operate under separate rules, and cross-border structures may trigger different outcomes under foreign tax laws or double tax agreements. The statement also cautions that income tax treatment does not necessarily align with GST treatment, which depends on separate registration and supply rules. This is a critical distinction for advisors working with mixed-use or multi-entity businesses.

IS 25/11 consolidates these principles into a single, authoritative source. Previously, guidance had to be pieced together from Tax Information Bulletins, product rulings, and informal practice. The statement now provides a central reference point that offers certainty and consistency for practitioners and clients navigating complex partnership arrangements.

While IS 25/11 doesn’t change the law, it articulates it in a way that reflects the complexity of modern business relationships. For clients who don’t think they’re in a partnership—until Inland Revenue does—this guidance could not have come at a better time.