Income tax Dates
When a shareholder draws or borrows more money from the company than they have loaned to it, their shareholder current account becomes overdrawn. Being overdrawn may have tax consequences.
What is a shareholder current account?
A shareholder current account is a record of the net balance of funds the shareholder has loaned to and withdrawn or borrowed from a company. A shareholder current account is also called a shareholder loan account.
Overdrawing the shareholder current account
Over a year a shareholder often takes drawings from a company to cover their private spending, like living costs. These drawings are usually taken before they get income such as salary, dividends or interest from the company.
The shareholder’s current account balance is often not known until after the end of the financial year when their income is calculated and credited to the shareholder’s current account.
The current account can become overdrawn at any time during the year. Being overdrawn indicates the company is lending the amount of the overdrawn balance to the shareholder.
Some income can be credited to the overdrawn shareholder current account at an earlier date. This credit is generally accounted for either on the 1st day of that income year or on the day the balance of the current account was first overdrawn during that income year, whichever is later.
A company cannot claim an income tax deduction for drawings taken by its shareholders because the drawings are not an expense.
Paying interest on the balance owed
If the current account is overdrawn, the company and the shareholder may agree that interest at the prescribed interest rate or the market rate is payable on the balance owed. The interest charged is:
- taxable income to the company
- usually non-deductible to the shareholder.
However, because the shareholder is paying interest, they may need to deduct Resident withholding tax (RWT) or give investment income information to Inland Revenue.
Where interest is charged at a rate that is below the prescribed interest rate or the market rate, or where no interest is charged, there may be Fringe benefit tax (FBT) or dividend implications.
Tax Technical advice
Our Tax Technical website has more information about overdrawn shareholder current account balances.
IS 24/09: Income tax – Overdrawn shareholder loan account balances