Have you borrowed money from your company for a holiday lately?

In December 2025 the Inland Revenue (“IR”) released an issues paper proposing significant changes to the way certain shareholder loans are taxed.  If you’re involved in a “close company”[1] and treat the shareholder current account as a ‘flexible funding’ tool, this is one to pay attention to.  It is proposed these rules will take effect on or after 4 December 2025 (i.e. backdated), even though they are not fully formed, the Minister and Cabinet have not signed off, they have not been passed by Parliament nor signed into law by the Governor General.

IR’s concern

Shareholders owe their own companies a lot of money. 

We are told in the 2024 tax year approx. 1,119 companies were owned nearly $29 million by their shareholders, but half of these were less than $50k.  Of these 5,550 companies had shareholder loan balances exceeding $1 million, 540 companies had shareholder loans of more than $5 million.  Concerningly, nearly 15% of liquidated companies over a 6-year period had shareholder debts left unpaid with the average outstanding balance of approx. $85k per company or a combined value of $2 billion. 

Evidence indeed that significant sums of company money is finding its way to shareholders’ pockets, and sometimes not finding its way back.

What is IR trying to achieve?

IR’s stated goals include:

• To align New Zealand’s treatment of shareholder loans with other jurisdictions;
• To ensure funds remain available within companies for reinvestment; and
• To increase the pool of funds available to creditors (including IR) in in the event of liquidation; and
• To reinforce the principle that a permanent transfer of value from a company to a shareholder should be taxed as income.

That last point is key.  A dividend is taxable to the shareholder and is a permanent transfer of value from a company.  A director cannot lawfully approve a dividend without satisfying the company’s solvency both before and after the dividend.  Notification is made to the Revenue, withholding tax paid.  Everything is known and everything is disclosed.  IR considers in many cases, shareholder loans operate economically like dividends – just with better timing flexibility (or in plain speak ‘significant deferral of tax’).  And timing, in tax, is everything.

Shareholder loans are not automatically treated as dividends.  The benefit of a loan is only the interest of the loan is taxed (to the company, not the shareholder).  Only where interest is charged below the prescribed IR rate or a market rate (if lower) is the shortfall in interest taxable to the shareholder.  Again, it is not the whole loan, just the interest component unless the loan is written off or otherwise becomes non-repayable.   It is this situation the IR is looking to address.

In summary the current situation is:

• Any Dividend is taxed in the year it is credited (or paid or applied to the benefit of the shareholder);
• Dividends are taxed at a shareholder’s marginal tax rate (up to 39%), with imputation credits (if any) attached;
• Company income is taxed at 28% – an 11% difference;
• Interest on shareholder loans can be capitalised to the loan, effectively deferring the impact of both the ‘interest’ charged to the shareholder and eventual taxation of the core loan as a dividend;
• If the company has a tax loss it can absorb the interest income at no tax cost; and if no tax losses the tax difference between 28% on the interest amount v 39% on the principal can be significant;
• Some shareholders have no immediate intention or capacity to repay the company loan.

These characteristics do not apply in any other business structure such as sole traders, most partnerships, trading trusts, nor look-through companies[2].  In those situations, the business income is immediately taxed at the business’s marginal tax rate (up to 39%). 

IR argues this creates unfair benefit and provides little incentive for shareholders to repay shareholder loans.  And if a company is liquidated with loans outstanding – the “temporary” timing advantage can become permanent[3].

IR’s proposal:

IR’s core proposals are that certain shareholder loans by a close company to its shareholders be treated as a “deemed dividend” where:

• The loan is not repaid within 12 months after the end of the income year in which it was made (so a maximum of 24 months from the initial loan); and
• The total shareholder loan balance exceeds a proposed $50k de minimis threshold per company[4]; or
• The loan remains outstanding at the time a company is removed from the Companies Office Register.

Points to note:

• The deemed dividend would arise on the last day of the following income year that the loan was made[5].
• Once deemed a dividend, normal tax rules apply[6].
• If the loan is later repaid the repayment would be ignored for tax purposes (more on this below).

All shareholder loans (including shareholder current accounts) would be aggregated when testing against the $50k threshold.  

IR propose an exclusion from the rules for loans to another New Zealand resident company shareholder (since funds remain within a corporate entity), however there is no proposal for exclusions for cross-border loans[7].

If the company is removed from the Companies Office Register, all outstanding shareholder loans would be treated as shareholder income[8] and taxable immediately to the shareholder.

Our key issues with the proposal

While IR’s objectives are understandable, the practical and technical implications raise several concerns.  IR notes that other jurisdictions already apply similar rules.  New Zealand’s proposal aligns more closely with Australia, where there is no refund of tax paid if a loan deemed to be a dividend is later repaid.  This is a deliberate policy choice, however it is also where significant concerns arise with a disconnect between commercial and tax treatment.  Under the proposal:

• A loan that exceeds $50k and is being repaid over time (say over 3-5 years), could be deemed a dividend.  This could be just five shareholders borrowing $10k each.
• The loan obligation would still legally exist, and the shareholder would still be required to repay it.  A liquidator can still recover the debt.
• For tax purposes, it would already have been treated as income to the shareholder.

This creates potential double jeopardy as the shareholder pays tax on the deemed dividend, yet they must still repay the full loan principal.  Clearly, this is to disincentivise these types of loans, targeting again the compliant taxpayer not the defaulting one.

There is currently a reversal mechanism for deemed dividends under existing tax law.  IR’s proposal explicitly intends to remove any reversal if the affected loan is later repaid. 

That’s difficult to justify – if the concern is permanent value transfer, logic suggests that repayment should unwind the dividend treatment.  Without a reversal mechanism, the rules risk taxing something that ultimately was not a permanent transfer at all and will catch out many shareholders whose advisors are unaware of the tax change, or where they are behind with filing their annual tax returns.[9]

Secondly, there are issues with potential imputation credit streaming where a company has more than one shareholder, but not all shareholders have outstanding loan balances. 

Questions arise such as:

• Can imputation credits be streamed to the affected shareholder?
• What if the company lacks sufficient imputation credits?
• What if another dividend was declared earlier at a different imputation ratio?

A company will have already paid 28% tax on its profit; the shareholder is then taxed on the deemed dividend at up to 39%.  If a company does not have imputation credits available there will be no credits available to offset that tax[10].  This effectively results in double taxation of the same income[11] – a material consequence.

The standard imputation ratio is 28%.  If a deemed dividend arises automatically, will 28% apply by default?  If a different ratio was previously used during the year, does the company still need to notify IR of a change?  If the deemed dividend occurs at financial year end (e.g. 31 March) there is already 12 months of other dividends or different deemed dividend fixing ratios that have occurred.  Even by moving this new rule forward by one day (to the beginning of the next year, e.g. 1 April) could make a difference to being able to fix the problem or reverse it in time.

One of the risks of a standard deemed dividend is by the time the accountant or tax advisor knows about it the opportunity to attach IC’s (or vary a ratio) is permanently and irretrievably lost[12].  The IR do not discuss this significant practical issue in their proposal.  The mechanics here are far from straightforward – particularly for companies with multiple shareholders or inter-connected companies.

Any aggregation across related companies, loans involving associated persons, and multiple shareholder accounts introduces complexity tracking across multiple entities required with compliance costs likely to increase.

Triggered on Company removal

As discussed above, in addition to deeming dividends are taxable within 24 months of the loan, any debt remaining outstanding on a company removal will immediately tax the shareholder on the loan.  Not a lot of people know that outstanding debts to a company on removable become the property of the Crown (and the Crown can collect the debt, which will be greater than the tax on the debt).  IR note the Crown is not always aware of these assets, and there is ambiguity of the timing of when the debt is legally written off.  Thus giving the debtor shareholder plenty of time to do a runner, die or spend it all.

Call us old fashioned, but perhaps aggressively pursuing shareholder debt immediately (change the company law) will bring many shareholders to heel sooner.  And, if by this time the debts are all under $50k per company the loss will not be $2 billion every six years.

Possible exceptions:

IR have suggested excluding some loans from the scope of the rules, in particular loans made under an employee share scheme.  The proposal would not apply to pre-existing loan balances (unless there are ‘material variations’ to the terms after the introduction of the rules).  But the proposal is these rules will take effect from 4 December 2025!    

While the de minimis threshold count will include existing loan balances the new deemed dividend will only apply to loans amounts made after the introduction of the rules.

IR have also indicated possibly excluding this type of deemed dividend from withholding taxes.  Again, there are consequences for this.  One being the company doesn’t have to front up with the withholding tax amount (which could be as high as 33%)[13] and the full tax liability falls on the shareholder.  If one of the key fiscal risks is the shareholder is not good for the debt[14] nor the tax, the minimum protection to the Crown would be to legislate for the company to account for the majority of the shareholders (artificially created) tax liability.

Other proposals

Further proposals include new record keeping and reporting requirements for:

• Available subscribed capital (ASC) and
• Available capital distribution amount (ACDA).

Translation: more tracking, more documentation and more administration.  There is some logic to this and best practice to maintain these in our opinion.  Our first concern is another series of annual disclosures and the compliance cost.  Our second concern is the ACDA could change overtime as it is not necessarily fixed.  Particularly in relation to capital gains, which on realisation may be ‘tainted’ but overtime become ‘untainted’.[15]  Could disclosure one year be capable of changing in a later year? 

Our final thoughts

We acknowledge that there are risks to the Crown when companies collapse with shareholders owing millions and disappearing or unable to pay their tax liabilities. 

We also acknowledge there are many SME’s where shareholders treat their company as an extension of themselves, and therefore if the company has money why can’t they just borrow it?  This is a particular problem where a company has realised a long-term capital gain, but shareholders cannot access it tax-free unless the company is in liquidation[16].  Not every business wants to expand their operations or reinvest in the business with its ‘spare’ cash[17].  If the company is still profitably trading, the existing laws prevent access to past capital gains tax-free.  When comparing apples with apples, it should be noted that non-corporate structures do not have this same prohibition on accessing tax-free capital gains.  Could it be that this arguable ‘flaw’ in the current legislation on capital gains is the root of much of the problem?

We note that long-term loans to shareholders can defer a future tax liability and can be seen as a ‘borrow now, pay later’ mindset.  But they are also critical to the revolving nature of being in business.  It does the economy no good to discourage SME’s from taking business risks including capital expansion, hiring or spinning off a successful division, if the reward for making a profit is to immediately tax the shareholders.  Business profit is circular.  One year up, two years down (or vice versa).  In our opinion, giving only “up to 24 months” to repay an interest-bearing loan is not realistic in any economic climate.

SME’s are told they must pay market salaries to their shareholders, must pay their employees more, must increase KiwiSaver contributions, yet they must fund capital costs; provide for rising overheads of insurance, stock and R & D development; maintain fraud and IT protection; maintain high H & S processes; support employees who can’t work, won’t work or present legally ‘complex’ situations the employer must negotiate.  All the while the business is in danger of falling off a cliff (and if it does, hope it will bungy back up).  

Paying a dividend this year because two years ago it was a good year, which could cause the company to default next year when it is not, is not a good idea any year[18]. 

Where to from here?

We note that submissions on the issues paper are closed, so we now wait to see whether the Government progresses these potentially controversial changes, particularly in an election year, as this change is unlikely to be a crowd-pleaser.  At the risk of repeating ourselves backdated law is never good law.

While IR’s concern is understandable the proposed solutions raises technical, commercial and fairness concerns, in particular around:

• Lack of a reversal mechanism;
• Potential double taxation;
• Imputation credit complications;
• Compliance burden;
• Placing greater burdens on SME’s when the Government needs them to flourish, merely because there are a few bad apples who will always default somehow is not good; and
• Backdated law is never good law.

We will be watching to see how these proposals evolve over the coming months.

As always, if you want to discuss your situation with us, we are happy to chat over a coffee and cheese scone.

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[1] This is a defined term, but assume for the purposes of this paper it means SME’s where the shareholders are either related and/or have long-term intertwined arrangements within small numbers of shareholders.

[2] Assuming the partners and LTC owners are individuals or trusts.

[3] But for the fact the shareholder can be pursued by any liquidator for the failure to pay.  Often too late to recover from a defaulting shareholder.

[4] IR is also considering aggregation rules across related companies and associated persons.

[5] For many companies this would be 31 March.

[6] But would it?  See our further discussion below.

[7] Where either the company or shareholder are non-resident, which we find an anomaly to other cross-boarder legislation that tries very hard not to skew international taxation norms.

[8] With no de minimis relief.

[9] A company with a registered tax agent often and very legitimately may file their annual tax return 12 months after the end of the financial year.  So, there is not an ‘up to 24 months’ period to resolve any issues, there could be just months after being advised they are in imminent danger for a shareholder to refinance their personal borrowings to repay the company or consider and approve a solvent dividend to repay the debt.

[10] That is, the IC’s may have been lost for various reasons, may have already been used for a formal dividend that was paid in cash (not offset against the loan) or were used up to pay dividends in earlier years that did not have IC’s to cover earlier profits.

[11] Once in the company, once in the shareholder’s hands and still the principal loan (and accumulated interest) is repayable.

[12] Although there is a standard deferral period into the next financial year of when a deemed dividend occurs, allowing time to fix the problem.

[13] If there is are no IC’s attached, or 5% if fully imputed.

[14] The shareholder defaults at the point of liquidation, if not before having burnt though the money.

[15] It’s complicated but not uncommon.

[16] Classically this is where a company sells some farmland (often to refinance); where a successful R & D product is spun out; where a company downsizes due to partial retirement; where there is family succession; where capital assets are no longer suitable for the business.

[17] Something to do with eggs all in one basket.

[18] Tongue twister test.