Company loans to shareholders – change of tax treatment likely to come

Many New Zealand business owners use shareholder loans (also commonly referred to as overdrawn current accounts), drawing money from their company to support personal cash flow or fund investments as part of their normal tax and cash flow planning. Under the current tax rules, these loans typically don’t trigger immediate tax for the shareholder beyond interest adjustments. However, that may be about to change.

Why Inland Revenue Is Proposing Change

Inland Revenue (IRD) has raised concerns that the existing tax treatment of shareholder loans can create tax advantages compared to receiving taxable dividends or salary. Under current settings:

• Shareholders who take money out of a company as a loan may pay less tax than if they received the same funds as salary or dividends.

• Some loans remain outstanding for long periods or until the company is wound up, meaning tax may never be collected.

• Large outstanding loan balances show this is more than a minor issue for many companies.

This has prompted IRD to consult on a package of proposed changes aimed at improving both fairness and integrity in the tax system.

What the Proposed Tax Changes Would Do

Here are the key changes currently under consultation:

1. Treating Certain Shareholder Loans as Dividends

Under the main proposal, new loans made on or after 4 December 2025 would be treated as taxable dividends if:

• The total amount of loans to shareholders exceeds a proposed threshold (suggested at $50,000 per company), and

• The loan isn’t repaid within 12 months after the end of the income year in which it was made.

If that happens, the amount could be taxed to the shareholder as a dividend, potentially at their personal tax rates, rather than treated as an ongoing loan balance.

This is similar to rules already in place overseas (e.g., Australia, UK, Canada), where long-term or excessive shareholder loans are not allowed to persist indefinitely without tax consequences.

2. Taxing Outstanding Loans on Company Removal

Another proposal would treat any unpaid shareholder loans as taxable income for the shareholder when a company is removed from the Companies Register (e.g., on strike-off or liquidation). These loans could be treated as deemed dividends or income under financial arrangement rules.

This means that if a company closes with loans still owing to shareholders, those amounts could become taxable at that point, even if they hadn’t previously been treated as dividends.

3. Stronger Record-Keeping and Reporting

To help support fairer taxation and compliance, IRD is also considering expanded reporting obligations and record-keeping requirements, such as maintaining memorandum accounts for Available Subscribed Capital (ASC) and Available Capital Distribution Amounts (ACDA).

What This Means for Business Owners

Although these changes are still proposals, their potential impact should not be underestimated:

Cashflow planning may need to change. If shareholder loans are no longer tax-effective for long-term funding, directors and shareholders might favour salary or dividends, with the tax paid up front.

Loan timing and structuring become important. Ensuring any loans are repaid within the allowable timeframe (if these rules pass) will be key.

Company closures or restructures could trigger tax events. Outstanding loans at the time of deregistration may create unexpected taxable income.

What You Should Do Now

• Review any existing shareholder loans—consider how much is outstanding and when they were made.

• Talk to your accountant or tax adviser about the potential impact of these proposals on your business and personal tax position.

• Plan ahead for repayments or alternative distributions before these rules take effect (if enacted).

As the consultation period has closed and IRD prepares advice to Ministers, there is still uncertainty about the final form and timing of any legislation but the direction of travel is clear: IRD wants to limit the use of shareholder loans as a long-term tax-free cashflow strategy.

If you’d like help reviewing your shareholder loan position or updating your tax planning, the team at Affinity Accounting are here to help. Contact us for tailored advice and proactive tax guidance.

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