Eyes on Tax: Improving taxation of loans made by companies to shareholders and ASC record-keeping

Inland Revenue has released an Issues Paper inviting submissions on the taxation of loans made by companies to shareholders. This initiative marks a significant development in New Zealand’s evolving tax landscape, aiming to address concerns about fairness, consistency, and the integrity of the tax system.

Current position, shareholder borrowing

Accountants often refer to a shareholder’s “overdrawn current account”, which is essentially a loan from the company to the shareholder. Under current rules, if an appropriate rate of interest is not charged, the value transferred to the shareholder (i.e., an interest-free loan) is treated as a taxable dividend equivalent to the interest forgone by the company.

The prescribed interest rate, currently 6.67% p.a., is set in accordance with economic indicators such as the Official Cash Rate (OCR).

For example, a $1,000 loan for one year:

• If no interest is charged, the shareholder receives taxable income of $67
• If interest is charged, the company receives taxable income of $67.

The principal amount of the loan is not taxable.

Inland Revenue concerns

Recent Inland Revenue data reveals that, as at 31 March 2024, 119,000 companies were owed nearly $29 billion by natural person or trust shareholder.  This amount is increasing.  New Zealand’s rules differ markedly from those in other jurisdictions.

Key issues include:

• Loan principal is not taxed as income, providing shareholders with a deferral or, in some cases, an absolute tax advantage.
• Shareholders may be incentivised to borrow from their companies rather than receive dividends, thereby sheltering income at the company tax rate (28%) instead of their marginal rate (up to 39% for trusts and individuals).
• The current settings may be unfair compared to other business structures (e.g., partnerships, sole traders, employees), who are taxed at their highest marginal rates.

Proposals

The Issues Paper proposes three principal measures:

1. Shareholder loans exceeding a specified threshold (e.g., $50,000) would be treated as dividends if not repaid within a set period (proposed to be if not paid within 12-months of the end of the relevant income year).
2. Loans outstanding at the time of removal from the Companies Register would be treated as income (three months after removal).
3. Record-keeping and reporting requirements for tracking available subscribed capital and capital distribution amounts.

Exceptions under consideration include:

• Grandfathering of existing loans (see below).
• Loans made on commercial terms with proper documentation (similar to the Australian approach).
• Loans under employee share schemes.
• Loans made in the ordinary course of business.
• Loans funded from a capital gain made by the company.

Loans existing prior to the publication of the Issues Paper, 4th December, will be unaffected by any changes. 

BDO’s Eyes on Tax perspective

Given the scale of overdrawn current accounts, it is unsurprising that reform is being considered. Although we do note that the proposals represent a further step toward removing the corporate veil for income tax purposes.

We support the proposal to grandfather existing loans, as retrospective legislation is generally inconsistent with sound tax policy.  Noting the data provided by Inland Revenue and quantum, requiring repayment or taxing the amount as a dividend could result in unintended consequences.

There are many key questions, these include:

• Does the proposal achieve sufficient consistency and fairness across business structures? Should access to capital gains tax-free on liquidation be relaxed for companies, aligning with partnerships and sole traders?
• How would the rules apply to multiple shareholders, with not all borrowing from the company?  From the debtor shareholders’ perspective we suspect that the receipt of a “dividend”, taxed at 39%, would be logically preferred to paying 100% of the debt outstanding.  The non-debtor shareholders would logically prefer the company is repaid.  From the debtor shareholder’s perspective, is the outcome that they receive taxable income AND repay the debt outside of the timeframes; is a reversal mechanism required?
• Is harmonization with overseas jurisdictions necessary, given there are numerous examples in our tax system where we depart from other jurisdictions?
• Is the current approach to taxing the use of money on shareholder debt fundamentally flawed?

This is a significant development proposed in our tax system and we look forward to continued dialogue.  Submissions close on 5th February 2026, please share your views with your local BDO Tax adviser.