Proposed Changes to Shareholder Current Accounts: What Business Owners Need to Know

If you are a small business owner, you are likely familiar with shareholder current accounts. In simple terms, when you contribute personal funds to your company, your shareholder current account is in credit. This means the company owes you money. When you withdraw funds from the company that are not paid as salary or dividends, your shareholder current account becomes overdrawn (in debit). This represents a loan from the company to you, meaning you owe money back to the company.

An overdrawn shareholder current account is treated as an asset of the company. Traditionally, when shareholders repay this loan and pay interest at the prescribed rate, the interest becomes taxable income of the company and is taxed at the corporate tax rate. This arrangement has been widely used by small businesses in New Zealand.

In recent years, Inland Revenue has become increasingly concerned about how shareholder loans are being used. On 4 December 2025, Inland Revenue released a consultation paper proposing changes to the taxation of loans made by companies to shareholders. The document outlines the current rules, identifies perceived weaknesses, and proposes reforms. Inland Revenue is seeking feedback from the public and professional bodies before making final policy decisions.

These proposed changes are highly relevant to small businesses, as most closely held companies use shareholder current accounts in some form. At year-end, accountants routinely review shareholder current accounts and conduct solvency tests. These balances also become critical when a company enters liquidation, as outstanding shareholder loans can significantly affect creditors’ outcomes.

Why Inland Revenue Is Concerned

Inland Revenue considers that the current tax rules for shareholder loans are inadequate and create inefficiencies in the tax system. Their main concern is that shareholders can withdraw large sums from their companies and delay repayment for extended periods, while paying only interest. This allows them to avoid paying personal income tax on that amount in the short term.

In contrast, shareholders who receive dividends or shareholder salaries are taxed immediately. Inland Revenue believes this creates an imbalance in the system.

While this arrangement is technically a tax deferral rather than permanent tax avoidance, problems arise when loans are never repaid. If a company later goes into liquidation, it becomes difficult for liquidators and Inland Revenue to recover these amounts. In many cases, the shareholder loan remains outstanding and unrecoverable.

This risk has increased in recent years, particularly as liquidation rates have risen. Liquidators frequently encounter substantial unrepaid shareholder loans, which weakens creditor recoveries. Industry feedback suggests this has been a key driver behind Inland Revenue’s review.

Threshold for Small Loans

Inland Revenue has proposed introducing a de minimis threshold, potentially around $50,000. Loans below this level would generally be excluded from the new rules.

According to Inland Revenue data, for the year ended March 2024:

• Approximately 119,000 companies had outstanding shareholder loans.

• About half of these had balances below $50,000.

• Around 5,000 companies had balances exceeding $1 million.

• Approximately 500 companies had balances exceeding $5 million.

This suggests that Inland Revenue intends to focus on larger, higher-risk cases, while minimising compliance costs for smaller businesses.

Background: Why This Matters in New Zealand

Businesses in New Zealand can operate as sole traders, partnerships, companies, or trusts. Each structure has different legal and tax characteristics.

Companies are separate legal entities, and shareholders generally have limited liability. This makes shareholder loans particularly significant.

New Zealand’s corporate tax rate is 28%, while the top personal tax rate is 39%. This creates an 11% tax gap. When shareholders leave profits in a company or withdraw funds as loans, they can defer paying the higher personal tax rate.

By paying only interest on the loan, shareholders can delay paying the additional 11% personal tax. While this is technically a timing difference rather than permanent avoidance, Inland Revenue is concerned that this gap is being exploited.

This concern has increased since the top marginal tax rate rose from 33% to 39%.

Current Rules: An Example

Consider the following example used in Inland Revenue’s consultation:

Simon is a shareholder of Simon & Co Limited. His personal tax rate is 39%.

In 2025, the company earns $1 million in taxable profit and pays company tax of $280,000 (28%). This leaves $720,000 in retained earnings and $280,000 of imputation credits.

If Simon receives this as a dividend, he receives:

• Cash dividend: $720,000

• Imputation credits: $280,000

His total taxable income is $1 million. At 39%, his tax liability is $390,000. After using imputation credits of $280,000, he must pay an additional $110,000 in tax.

Alternatively, Simon could withdraw $720,000 as a shareholder loan and pay interest at the prescribed rate. In this case, he avoids paying the $110,000 immediately. The tax is deferred until the loan is repaid through dividends, salary, or other means.

While this is acceptable under current rules, problems arise if the loan is never repaid.

International Comparisons

Inland Revenue reviewed how other countries treat shareholder loans:

• Norway: Loans must be repaid within 60 days.

• United Kingdom: Loans must be repaid within nine months after year-end.

• Canada: Loans must be repaid within 12 months after year-end.

• Australia: Loans must be properly documented and repaid within 7–25 years, depending on security. Undocumented loans must be repaid within 10 months.

New Zealand’s tax system is closely aligned with Canada’s, and Inland Revenue appears to be moving towards a similar approach.

Proposed New Rule: Loans Treated as Dividends

Under the main proposal, shareholder loans that are not repaid within 12 months after the end of the income year will be treated as dividends.

This means overdrawn shareholder current accounts could no longer be carried forward indefinitely.

Example 1: Loan Not Repaid

On 22 April 2027, a company lends $500,000 to its shareholder, Simon. The loan is repayable over 10 years with quarterly interest.

The loan is made in the 2027–28 income year, which ends on 31 March 2028.

Under the proposal, the loan must be repaid by 31 March 2029.

If it is not repaid by that date, the $500,000 will be treated as a taxable dividend to Simon.

Example 2: Loan Repaid

At 31 March 2028, Simon’s shareholder current account is overdrawn by $100,000.

During the 2028–29 year, he repays $120,000.

At 31 March 2029, the account has a credit balance of $20,000.

Because the loan has been repaid, the new rules do not apply.

Application Date

Inland Revenue has suggested that the rules would apply from the date the discussion document was released (December 2025), once legislation is enacted.

Importantly:

• The new rules would apply only to new loans.

• Existing loans made before December 2025 would generally not be affected.

Possible Exceptions

Inland Revenue is still consulting on possible exceptions. Areas under review include:

• Capital gains and liquidation distributions

• Commercial loans with formal documentation

• Loans under employee share schemes

• Loans made in the ordinary course of business

It is likely that genuinely commercial loans and employee share scheme loans may be excluded, but further guidance is expected.

Record-Keeping and Reporting Changes

If implemented, Inland Revenue is likely to introduce new reporting requirements in company tax returns and supplementary forms.

Companies may be required to provide more detailed information on:

• Shareholder current account balances

• Loan movements

• Available subscribed capital (ASC)

• Capital distribution amounts

Inland Revenue is proposing amendments to the Tax Administration Act to require formal tracking accounts and enhanced record-keeping.

These changes would improve transparency and give Inland Revenue better tools to monitor shareholder lending arrangements.

Conclusion

The proposed changes represent a significant shift in how shareholder current accounts are treated for tax purposes. While aimed primarily at large and persistent loan balances, the reforms will affect most closely held companies.

Business owners should begin reviewing their shareholder loan practices, repayment strategies, and documentation. Proactive management of shareholder current accounts will become increasingly important under the proposed framework.

As the consultation process continues, further refinements are expected. Professional advice will be essential to ensure compliance and minimise unintended tax consequences.