Drawing money from your company: when a “loan” becomes a dividend

For the owner of a small company, taking money out as a “loan” or letting a current account run overdrawn can feel harmless — it is your company, after all. But New Zealand tax law treats company money carefully. An unpaid shareholder loan can be taxed as a dividend, and where a “loan” is really a way to live off untaxed profits, the courts have reconstructed it as income, with penalties. Two well-known Kiwi cases show how it goes wrong, and a reform announced in December 2025 is about to tighten the rules further.

Key points

•    Money you draw from your company is not automatically tax-free — an unpaid shareholder loan can be taxed as a dividend.

•    An interest-free overdrawn current account can create a deemed dividend unless interest is charged at the prescribed rate (or FBT is paid).

•    Forgiving a shareholder’s loan is a transfer of value — a taxable dividend to the shareholder.

•    Courts have reconstructed large, open-ended “loans” as income (Penny & Hooper; Krukziener).

•    From 4 December 2025, a proposed rule would tax unpaid new shareholder loans over $50,000 as dividends.

Why company money isn’t simply “your money”

A company is a separate legal person, and its profits belong to the company until they are properly paid out. When value moves from a company to a shareholder because they are a shareholder, tax law calls it a dividend (subpart CD of the Income Tax Act 2007). (Income Tax Act 2007 — dividends.) Dividends are taxable in the shareholder’s hands, usually with imputation credits for the tax the company has already paid. A genuine salary, or repaying money the shareholder actually lent in, is different — but simply helping yourself to company funds, or letting a current account drift into the red, is where the trouble starts.

The overdrawn current account: a deemed dividend in waiting

‍This is the most common situation. The owner pays personal bills from the company account, or draws more than their salary and dividends, and the bookkeeper records it as a debit — an overdrawn shareholder current account, money the shareholder owes the company.

Under the current rules, an interest-free loan from a company to a shareholder confers a benefit — the interest they would otherwise pay. That benefit is treated as a dividend unless the company either charges interest at the prescribed rate set by Inland Revenue, or, for a shareholder-employee, accounts for fringe benefit tax on the loan instead. Inland Revenue’s 2024 interpretation statement, IS 24/09, sets out in detail how this works.

‍And if the company simply writes the balance off? Releasing a shareholder’s debt is itself a transfer of value — so the forgiven amount is deemed to be a dividend, taxable to the shareholder. (It is the same lesson as our family-trust article: forgiving a debt rarely makes the tax disappear; it usually just decides who pays it.)

When a “loan” is really income: two New Zealand cases

The greater risk is that a “loan” that was never intended to be repaid is recharacterised as income altogether, under the general anti-avoidance rule in section BG 1 of the Income Tax Act. Two cases make the point.

In Penny and Hooper v CIR [2011] NZSC 95, two Christchurch orthopaedic surgeons restructured their practices so that they were owned by family trusts and paid themselves salaries of about $100,000 to $120,000, when they had previously earned $600,000 to $850,000 on their own account. The profits were taxed at the lower company and trust rates, and one surgeon then borrowed the distributions back from his trust, interest-free and with no repayment terms, so that (as the Supreme Court put it) the money never really left his hands. The Court unanimously held the arrangement was tax avoidance, and Inland Revenue reassessed both surgeons on commercially realistic salaries.

In Krukziener v CIR [2010] NZHC 1714, the Auckland property developer Andrew Krukziener — who built the Metropolis tower — drew about $5 million from his group of companies and trusts through current accounts over roughly a decade, while taking only a modest salary. For some years, no interest was charged, and there were no fixed repayment dates. Justice Courtney in the High Court upheld the Taxation Review Authority’s finding that the dominant purpose was tax avoidance: the “loans” were reconstructed as income, and penalties followed.

The thread running through both is important: the structures themselves were perfectly legal. What sank the taxpayers was using loans to enjoy company profits, year after year, without ever paying tax at their own rate.‍ ‍

The one thing most company owners get wrong

‍The belief that does the damage is: “It’s my company, so it’s my money.” It is not — not until it has been properly paid out and taxed. Drawing freely and parking the total in a current account does not avoid tax; it defers a problem that grows every year. Inland Revenue’s own data shows roughly 119,000 companies were owed about $29 billion by their shareholders in the 2024 tax year, with thousands of balances over $1 million, which is exactly why the rules are now being tightened.

A real example — and the simple fix

‍ Take Mike, the sole shareholder of Kowhai Construction Ltd (the name is invented; the pattern is everywhere). Throughout the year, he paid personal expenses from the company account, and by the balance date, his current account was overdrawn by $140,000. If that loan is not repaid the company should be charging Mike prescribed-rate interest (or paying FBT), and the unpaid loan balance is squarely exposed under the tightening rules. If the company “forgives” it, Mike has a $140,000 dividend to declare.

‍The fix is ordinary and clean: declare a dividend (or pay a higher shareholder salary) and credit it against the current account, so the drawings are taxed as what they really are. Mike pays the right tax once, the account is square, and there is nothing left for Inland Revenue to reconstruct. Better still, plan drawings against expected salary and dividends during the year, so the account never runs deep into the red in the first place.

What you can do — and where we can help

‍If you take money out of your own company, a few habits keep you safe:

•     Keep the current account out of the red. Match drawings to your salary and dividends across the year.

•     Charge prescribed-rate interest on any overdrawn balance (or pay FBT), and document it. It is the step that stops a deemed dividend arising.

•     Clear a balance with a dividend or salary, not a write-off. Forgiveness is a taxable dividend; a properly taxed distribution clears it cleanly.

•     Don’t use “loans” to live off untaxed profits. That is the precise pattern the courts and Inland Revenue target.

•     Get the lawyer and the accountant aligned. Company law, the constitution and the tax position all have to fit together.

RHL advises company owners on shareholder current accounts, dividends, resolutions and restructures — alongside your accountant. ‍

Where to get information and support

•     Inland Revenue — IS 24/09, overdrawn shareholder loan account balances

•     Income Tax Act 2007 — dividends (subpart CD)

•     Inland Revenue — Penny and Hooper case summary (Revenue Alert RA 11/02)

•     Inland Revenue — Krukziener case summary (current-account loans as income)

•     Inland Revenue — consultation on taxing company loans to shareholders (Dec 2025)

•     RHL — business law  ·  your own accountant or tax adviser, for figures specific to your company.

One change to watch

On 4 December 2025, the Government released an issues paper proposing to tax shareholder loans more like dividends. The main idea: a new loan from a company to a shareholder (including an overdrawn current account), made on or after 4 December 2025, would be treated as a taxable dividend if it is still unpaid after two balance dates — broadly 12 to 24 months — where the company’s total shareholder loans are $50,000 or more. A separate proposal would tax unpaid shareholder loans when a company is removed from the Companies Register, and would require companies to provide new reporting on their capital accounts. Imputation credits could likely be attached to the deemed dividend. None of this is law yet — consultation has closed, and there is strong pushback — but the direction is unmistakable, and the start date is already behind us. If you have taken new drawings since early December 2025, it is worth tracking them separately now. We will keep an eye on the final rules.

Current account drifting into the red, or a large shareholder loan on the books? You need help to clear it the right way — dividends, salaries, and resolutions that keep you on the right side of the rules — alongside your accountant. Get in touch.

This article is general information only and is not legal, tax or financial advice. It describes the law as of June 2026, which may change. The shareholder-loan changes described under “One change to watch” are a proposal still under consultation and may change or not proceed. Tax outcomes depend on your company’s specific facts, including whether it is a close company and whether its shareholders are also employees. Your situation is unique; please obtain specific legal and tax advice before acting.