Proposed Changes to the Taxation of Shareholder Loans

Inland Revenue has released an issues paper signalling a potential shift in how loans from companies to shareholders may be taxed. While no law changes have been enacted yet, the proposals highlight growing concern about the scale of shareholder borrowing and the way it is currently managed in closely held New Zealand companies.

For many business owners, this will come as a surprise – largely because what Inland Revenue refers to as a shareholder loan is often simply recorded in practice as an overdrawn shareholder current account.

Overdrawn current accounts = shareholder loans

In many owner-managed companies, personal expenses, drawings, or short-term funding needs are processed through a shareholder current account. When that account becomes overdrawn, the shareholder is effectively borrowing from the company.

From a tax perspective, there is no distinction – an overdrawn current account is a shareholder loan, even if it is informal, undocumented, or expected to “wash out” over time.

How these loans are currently taxed

Under current rules, the principal of a shareholder loan is not taxable. Instead, if interest is not charged at the prescribed rate, the shareholder is treated as receiving a taxable dividend equal to the interest forgone.

This approach taxes the use of money, but not the underlying loan balance – even where overdrawn accounts remain in deficit for many years.

Inland Revenue concerns

Inland Revenue data shows that, as of 31 March 2024:

• 119,000 companies were owed nearly $29 billion by shareholder-borrowers
• The average loan balance exceeded $245,000 per company
• Many balances are increasing, suggesting they are not short-term timing differences

IR is concerned that shareholders can effectively access company profits via overdrawn current accounts and loans, while deferring, or in some cases avoiding, tax at personal rates of up to 39%, instead paying tax at the 28% company rate.

Inland Revenue’s proposals

While still at consultation stage, Inland Revenue has outlined three key ideas:

1. Deemed dividends – New shareholder loans (including overdrawn current accounts) arising from 4 December 2025 could be treated as taxable dividends if not repaid within a defined period (generally 12–24 months), subject to a $50,000 threshold.
2. Deregistration rule – Outstanding shareholder loans could be treated as income when a company is removed from the Companies Register.
3. Increased reporting – Greater record-keeping around shareholder loan balances and capital accounts.

Existing loans are proposed to be grandfathered, provided the loan terms are not materially changed.

A change in expectations

If enacted these proposals would mark a departure from the (sometimes) casual approach taken with shareholder current accounts. A loan treated as a dividend would still exist as a legal debt meaning shareholders could be taxed on the amount while remaining liable for repayment.

This reinforces Inland Revenue’s expectation that shareholder current accounts should no longer function as informal or permanent funding arrangements.

What should business owners be thinking about

Even without legislative change, Inland Revenue’s direction of travel is clear. Business owners should:

• Understand whether shareholder current accounts are overdrawn, and by how much
• Recognise that these balances are loans, not drawings or temporary adjustments
• Actively manage repayments and avoid unchecked increases

Shareholder loans are not inherently problematic however unmanaged overdrawn current accounts are now firmly on Inland Revenue’s radar. Education and discipline will be key as expectations continue to tighten.

Submissions on the proposals close this week. We will keep you updated on how these proposed changes progress.