A business partnership is one of the simplest ways to run a business with another person in New Zealand. Unlike a company, a partnership is not a separate legal entity for tax purposes — income “flows through” to each partner who pays tax at their own personal rate. This transparency is both a simplicity advantage and a potential disadvantage compared to the flat 28% company tax rate.
A NZ partnership files a partnership tax return (IR7) but does not pay tax itself. Income is allocated to each partner according to their profit-sharing agreement, and each partner pays income tax at their own marginal rate in their own IR3. Partners pay provisional tax on their share of partnership income. If partnership turnover exceeds $60,000/year, the partnership must register for GST.
What Is a Partnership for Tax Purposes?
In NZ, a general partnership exists when two or more people carry on a business in common with a view to profit. No formal registration is required — a partnership can arise from behaviour alone, even without a written agreement.
A limited partnership is a separate registered structure with different rules — limited partners have limited liability and the Limited Partnerships Act 2008 governs their structure. The tax treatment is similar (flow-through) but there are additional rules.
For most small business partners operating informally together, the general partnership rules apply.
How Partnership Income Is Taxed
Step 1: The Partnership Files an IR7
The partnership itself files an IR7 Partnership Income Tax Return each year. This shows:
- Total partnership income
- Total partnership expenses
- Net profit (or loss)
- How the net profit is allocated to each partner
The partnership does not pay tax. The IR7 is an information return only.
Step 2: Each Partner Declares Their Share in Their IR3
Each partner takes their allocated share of the partnership profit and includes it in their personal IR3 income tax return. They pay tax at their own marginal rate.
Example — two equal partners:
| Item | Amount |
|---|---|
| Partnership net profit | $120,000 |
| Partner A’s share (50%) | $60,000 |
| Partner B’s share (50%) | $60,000 |
Partner A adds $60,000 partnership income to any other income they have and pays tax at their applicable marginal rates. Likewise for Partner B.
Partner Salary vs Profit Share
Partners often pay themselves a “partner salary” or “drawings” against the partnership income. For tax purposes:
- Partner salary is not a deductible expense for the partnership — it is simply an allocation of profit
- The full partnership profit (before any partner drawings) is allocated and taxed
- Drawings reduce the partner’s capital account but are not separately taxable
This differs from a company where a director salary is a deductible expense reducing company profit.
Losses in a Partnership
Partnership losses flow through to partners proportionally:
- Each partner claims their share of the loss in their IR3
- The loss offsets other personal income (salary, rental, etc.) — subject to the general loss limitation rules
- Unused losses carry forward to future years
This flow-through of losses is an advantage over a company structure, where losses are trapped in the company.
GST for Partnerships
A partnership is treated as a single entity for GST purposes. If the partnership’s turnover exceeds $60,000/year, the partnership registers for GST:
- Files GST returns under the partnership’s IRD number
- Issues and receives tax invoices as the partnership
- Individual partners do not separately register for GST on partnership activities
Provisional Tax for Partners
Each partner must pay provisional tax on their expected share of partnership income:
- Based on the prior year’s residual income tax (RIT) from partnership income
- Paid in three instalments (28 August, 15 January, 7 May)
- Applies to each partner individually — the partnership does not pay provisional tax
This is one of the administrative burdens of partnerships — each partner must manage their own provisional tax obligations based on fluctuating partnership income.
Partnership Agreement and Profit Allocation
IRD accepts any profit-sharing ratio that partners have genuinely agreed on. Common arrangements:
- Equal split (50/50, 33/33/33)
- Based on capital contribution
- Based on hours worked
- Combination of salary allocation plus residual profit split
The arrangement should be documented in a Partnership Agreement. IRD may scrutinise arrangements that appear to shift income to lower-tax partners without a genuine commercial reason.
Partnership vs Company vs Trust
| Feature | Partnership | Company | Trust |
|---|---|---|---|
| Tax rate | Personal rates (up to 39%) | 28% flat | 39% trustee rate (or beneficiary rates) |
| Loss flow-through | Yes | No — losses trapped | Losses trapped in trust |
| Liability | Unlimited (general partners) | Limited | Depends on structure |
| Admin complexity | Low–medium (IR7 + IR3s) | Higher (IR4, company register) | Higher (IR6, deed) |
| Best for | Simple small businesses | Growing businesses, income splitting | Asset protection, family wealth |
At high income levels, the 28% company rate is advantageous over personal rates (33%/39%). Partnerships work well for lower-income partners or where loss flow-through is valuable.
Frequently Asked Questions
Do I need a formal partnership agreement to be treated as a partnership for tax?
No — a partnership can exist without a written agreement if you and another person are carrying on a business together. However, without a written agreement, profit sharing defaults to 50/50 and disputes are harder to resolve.
Can a company be a partner in a partnership?
Yes — companies can be partners. The company pays 28% tax on its share of partnership profit.
My partnership has two partners on very different incomes. Is there a tax planning opportunity?
Potentially — allocating more profit to the lower-income partner can reduce the overall tax burden. However, IRD requires allocations to reflect genuine commercial arrangements. Purely artificial allocations to shift income to a spouse or family member with no business involvement may be challenged.
Do I pay ACC on my partnership income?
Yes — partnership income is self-employment income for ACC purposes. Each partner pays ACC levies on their share of partnership income, treated as liable earnings.