Shareholder loans under the spotlight: what Inland Revenue’s proposals mean for New Zealand business owners
1. Why shareholder loans are suddenly getting attention
Many closely held New Zealand companies don’t pay everything out as wages or dividends. Instead, shareholders take drawings that show up in the accounts as a loan from the company to the shareholder – an overdrawn current account.
Used properly, this can be a legitimate and practical way to manage cash flow. Inland Revenue accepts that and says most companies use shareholder loans responsibly: Tax Policy
Inland Revenue’s concern is with :
loans that grow to very large balances, and
loans that never seem to be repaid, especially where the company is eventually removed from the Companies Register with money still owing.
Inland Revenue’s data shows that for the 2024 tax year:
about 5,550 companies had shareholder loan balances over $1 million, and
more than 540 companies had balances above $5 million: Tax Policy
Over a recent six‑year period, almost 15% of companies removed from the Companies Register still had unpaid shareholder loans, totalling roughly $2 billion: Tax Policy
From Inland Revenue’s perspective, that suggests the current rules may allow some shareholders to enjoy what are effectively tax‑advantaged “loans” that behave like permanent income.
2. What Inland Revenue is proposing
On 4 December 2025, Inland Revenue released an issues paper and consultation documents on “Taxation of company loans to shareholders”: Tax Policy
The main idea is a time‑limit rule:
Certain loans by a company to its shareholders would be treated as dividends (and taxed as such) if they are not repaid within 12 months after the end of the income year in which the loan is made: Inland Revenue
To avoid hitting ordinary small‑scale arrangements, the proposal includes a de minimis threshold:
The time‑limit rule would only apply if the company’s total lending to shareholders is $50,000 or more.
Some other key points:
The new rule would apply only to new loans made after 4 December 2025. Existing loans would not be retrospectively taxed under the time‑limit: Inland Revenue
There would be new rules to deal with loans still outstanding when a company is wound up, so that tax is not permanently avoided if the company disappears while the shareholder keeps the cash: Inland Revenue
The proposals are out for public consultation, with submissions closing on 5 February 2026.
At this stage, these are proposals only. The Government still has to decide whether to adopt them, and if so, in what form.
3. How does this compare with the current position?
Right now, if your company lends money to you as a shareholder:
The company should generally charge you interest, and
That interest is taxable to the company at 28%.
The loan principal itself is not income to you, so you don’t pay tax on the drawings when you take them.
If, instead, the company:
paid you a salary, that would generally be taxed at your marginal rate (which could be as high as 39%), or
paid you a dividend, that would be taxable income to you as well (with imputation credits in play): Tax Policy
Inland Revenue’s view is that very large or long‑term shareholder loans can give some people a better tax outcome than if they simply received taxable income, and that the incentive to actually repay those loans is weak.
The proposed time‑limit rule is aimed at removing that advantage where loans look more like permanent income in disguise.
4. A real‑life example (names changed)
Example: The case of Pohutukawa Properties Ltd
Pohutukawa Properties Ltd is a closely held property investment company. Its sole director and shareholder, Liam, has been taking drawings for years. On the books, these are recorded as a loan from the company.
The idea has always been that “one day” the company will declare extra dividends, or Liam will sell a rental property to the company and repay the debt. Life is busy, and it never quite happens.
Over time, the shareholder loan balance climbed to $600,000. The company charges Liam interest and returns that interest income at 28%, but Liam hasn’t paid income tax on the $600,000 itself, because it’s treated as a loan.
Under the proposed rules, any new drawings from 4 December 2025 onwards that push Pohutukawa’s lending to Liam above $50,000, and which aren’t repaid within 12 months after the balance date, could be treated as taxable dividends to Liam. He could suddenly face tax at up to 39% on amounts he assumed were “just drawings”, potentially with little cash set aside to pay that tax.
This is simplified, but it shows the sort of behaviour Inland Revenue has in mind.
5. What should directors and shareholders be doing now?
If you operate through a company and you draw on shareholder loans, now is a good time to:
Review your shareholder current account
How much do you currently owe the company?
Has the balance been creeping up over the years?
Check how drawings are being classified
Are regular lifestyle withdrawals being treated as loans? Should they really be treated as salary, wages or dividends?
Are the loan terms, interest rate and repayment expectations properly documented?
Model the potential impact
What happens if, from 4 December 2025, you can no longer leave large loans outstanding for years?
Would you need to shift to a higher regular PAYE income or more frequent dividends?
Consider a repayment or restructuring plan
It may be sensible to put a formal repayment plan in place, or explore options like capitalising debt or changing how profits are distributed.
Any move has tax and legal implications, so it should be carefully worked through.
Think about making a submission
Professional bodies, industry groups and affected businesses may wish to submit on the proposals before 5 February 2026.
6. The right approach
The right approach will depend on your company structure, existing debts, future plans and cash‑flow needs.
You should:
review your company and shareholder loan documentation,
work with your accountant or tax adviser to stress‑test your current approach, and help you adjust your payment, dividend and loan policies so you’re not caught out if the law changes.
Reminder: This blog is not legal or tax advice. It provides a general overview only and is based on proposals that may change. For advice tailored to you, please contact Ross Holmes Virtual Lawyers Limited.
