Inland Revenue Targets Shareholder Loans

Do you owe money to your company? It could become a tax problem

If you’re a major shareholder, borrowing from your company is a handy way to access funds when you need them. Shareholders don’t necessarily pay back all the funds by the end of the tax year, resulting in an outstanding loan.

Up until now, this hasn’t been much of a tax concern, but the rules are likely to change soon, and you may be affected.

What’s the issue?

Currently, if you’ve borrowed money from your company, it can be a tax advantage. You may pay less tax compared to someone who is fully taxed on all their income: salary, wages, dividends and company profits.

IR is concerned that its current rules can create a permanent tax advantage if the loan is never repaid. The loans can be large: Inland Revenue (IR) reported that for 31 March 2024, 5,550 companies were each owed more than $1 million. The total owed was nearly $29 billion across 119,000 Kiwi companies.

IR thinks that large shareholder loan balances can contribute to insolvency and liquidations. And loan balances can be “unmanageable”, as one IR spokesperson puts it. When the media reports on liquidations with large shareholder loan balances, it undermines confidence in the tax system and seems unfair on creditors.

What is the proposed change?

IR wants to see three changes for all loans of $50,000 or more:

1. A time limit for repayment of 12 months after the end of the financial year when the loan was extended. For example, if you borrowed money in April 2027, you would need to pay it back by the end of March 2029.
2. Any outstanding loans would be taxed if the company ceased (ie, it was removed from the Companies Register).
3. Improved reporting to ensure compliance.

Any shareholder loan of $50,000 or more which remains unpaid after the time limit will be treated as a dividend. If these changes go ahead on schedule, they will apply to any new loans made on or after 4 December 2025.

What could this mean for you?

Do you owe $50,000 or more to your company, borrowed after 3 December 2025? If you do, this might affect you.

Can you pay the money back within the financial year following the year in which you borrowed it? If you can, there’s nothing outstanding. If you cannot, the loan will be treated as a dividend. You’ll pay tax on it at your marginal rate.

If your company is removed from the Companies Register and you haven’t repaid the loan, the balance would be treated as part of your taxable income. This would have an outsized impact on any trusts and anyone paying the 39% top tax rate.

There are some additional practical concerns. The first is double taxation, which could occur when you’re taxed on the balance as if it’s a dividend and then you later repay the loan. A second worry is for companies where shareholders are overseas; how will the rules apply?

Is this worth worrying about when it’s still just a discussion paper?

Indications are that IR is committed to making a change, partly with the aim of bringing our treatment in line with similar countries. The details may not be exactly as outlined in the discussion paper, but some degree of change is highly likely.

Not sure what your next steps should be?

We can help. If you think this might affect you or your company, give us a call or flick us an email. Our team of experienced advisors can look at your situation, assess your options, and outline the pros and cons of each one.

Together we can achieve more.