Inland Revenue is planning to crack down on shareholders taking loans from companies, in a move that could hand some, particularly small businesses, an extra tax bill.
Inland Revenue (IR) was asking for feedback on proposals to improve the way new loans by companies to shareholders are taxed.
David Carrigan Inland Revenue deputy commissioner for policy, said it would bring New Zealand’s treatment of loans in line with other similar countries, while still allowing the normal business use of short-term drawings.
“We recognise that most companies manage their loans to shareholders and drawings responsibly. However, the current rules can allow some loans to become unmanageable, to the point they may never be repaid. For instance, our data has revealed some very large outstanding loans from companies to their shareholders.
“For the 2024 tax year, IR data shows about 5550 companies had outstanding loan balances of more than $1 million each.
“When a shareholder borrows a large amount from their company and doesn’t pay it back, our current rules mean they can pay less tax compared to other shareholders who receive taxable dividends or taxpayers who earn income through salary or wages.”
The current rules often failed to collect tax on the funds left in the hands of the shareholder when a company was wound up, Carrigan said.
He said the main proposal was for a time limit that would treat certain shareholder loans as dividends, and tax them accordingly, if they were not paid back within 12 months from the end of the income year in which they were made.
“The change will only apply to new loans made after today, so it won’t apply to existing loans. To ensure it does not impact small businesses and ordinary transactions, the proposed time limit would only apply to companies whose total lending to shareholders is $50,000 or more.
“In addition to this main proposal, the issues paper also consults on proposals for outstanding loans to be taxed when a company is removed from the Companies Register and for improved reporting obligations on companies.”
Inland Revenue was going through a consultation period until February before it gives advice to ministers on the proposal.
Deloitte tax partner Robyn Walker said the proposal made it clear loans were common and a legitimate way to manage cashflow, and “not a problem per se”.
“However, the paper cites data about loan balances, with the key concern relating to companies and shareholders with material loan balances which have been outstanding for some time.
“For example, 5500 companies have shareholder loans outstanding of over $1m and 540 have loans of over $5m. The concern is that the use of loans with limited/no repayment provides an unintended tax benefit as compared to paying shareholder salaries or declaring dividends, and the use of — in some cases poorly documented — loans can be a contributing factor to other business issues such as being unable to pay creditors or outstanding tax debt.”
She said the impact would be most felt by small, family businesses.
“In some cases, there is a lot of blurring of the boundaries between business and personal expenses, particularly by using current accounts. The consultation paper indicates for around 50% of such businesses there is absolutely no issue because the outstanding loan balances are below the proposed threshold of $50,000; for the other businesses, 2026 should possibly be the year for talking with an accountant and putting in place a plan for managing how shareholders take money from the business.
“The paper points out that current accounts are not a problem in themselves, but it shouldn’t be one-way traffic of a balance just getting larger and the shareholder never earning anything in their own right.
“While interest is charged on loans and tax generated on that income, it results in a generally lower amount of tax in the short term and different timing of tax compared to when other taxpayers are paying tax for those who have no ability to pick and choose such as sole traders, employees…”
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