Inland Revenue (IR) is asking for feedback on proposals to improve the way new loans by companies to shareholders are taxed.
David Carrigan, Deputy Commissioner Policy says the proposals would bring New Zealand’s treatment in line with other similar countries, while still allowing the normal business use of short-term drawings.
Current law inadequate
“We recognise that most companies manage their loans to shareholders and drawings responsibly. However, the current rules can allow some loans to become unmanageable, to the point they may never be repaid. For instance, our data has revealed some very large outstanding loans from companies to their shareholders. For the 2024 tax year, IR data shows about 5,550 companies had outstanding loan balances of more than $1 million each.
“When a shareholder borrows a large amount from their company and doesn’t pay it back, our current rules mean they can pay less tax compared to other shareholders who receive taxable dividends or taxpayers who earn income through salary or wages.
“The current rules also often fail to collect tax on the funds left in the hands of the shareholder when a company is wound up.”
Main proposal
David Carrigan says “the main proposal in the issues paper, released today for consultation, is a new time limit rule which would treat certain shareholder loans as dividends if they aren’t repaid within 12 months from the end of the income year they were made.
“The change will only apply to new loans made after today, so it won’t apply to existing loans. To ensure it does not impact small businesses and ordinary transactions, the proposed time limit would only apply to companies whose total lending to shareholders is $50,000 or more.
“In addition to this main proposal, the issues paper also consults on proposals for outstanding loans to be taxed when a company is removed from the Companies Register and for improved reporting obligations on companies.
Consultation period
“Ministers have not made any decisions on these proposals. This consultation and the feedback people give will help us to ensure that the advice we give to Ministers is balanced and practical,” David Carrigan says.
The officials’ issues paper, Improving taxation of loans made by companies to shareholders, is available at taxpolicy.ird.govt.nz. Consultation closes on 5 February 2026.