An article from RNZ reports that Inland Revenue (IR) is proposing a crackdown on small companies’ shareholder loans, a change that could see many family-run businesses facing a heftier tax bill.
Overview
Under the proposed changes, new loans made by companies to shareholders would be subject to stricter tax treatment. If a shareholder loan is not repaid within 12 months after the end of the income year in which it was made, it could be reclassified as a dividend, triggering income tax.
Currently, the proposed threshold for this rule is set at any total shareholder lending over NZ$50,000. The rule would apply only to new loans made after the change takes effect.
The move is partly motivated by IR data showing that about 5,550 companies had outstanding loan balances of more than NZ$1 million each in 2024.
Insights
- The crackdown aims to bring New Zealand’s treatment of shareholder loans more in line with practices in other countries.
- Shareholder loans that remain unpaid beyond 12 months could be taxed as dividends, potentially increasing tax liability for company owners.
- The $50,000 threshold for shareholder lending means that smaller, family-owned companies may be hit, though not all will be affected, for around half of these businesses, the outstanding balances are below that level.
- Expert advisers argue the threshold may be too low, and that normal commercial loans from company to shareholder ought to be treated differently from loans that are essentially drawings or unpaid distributions.
Our Thoughts
This proposed reform could mark a significant shift for many families and small businesses in New Zealand. On one hand, it addresses a real concern: shareholder loans that are never repaid effectively allow owners to draw funds tax-free, especially if the business later folds, a loophole that undermines fairness and erodes the tax base. On the other hand, the one-size-fits-all threshold may unfairly burden genuine small businesses that rely on flexible cash-flow management, particularly when business incomes fluctuate seasonally or investment cycles require reinvestment.
It will be essential for the final legislation to clearly distinguish between legitimate, documented commercial loans and informal current-account drawings that serve as de facto income. Good record-keeping, transparent shareholder agreements, and possibly more nuanced thresholds or carve-outs could help. For many family-run businesses, now may be the time to review their loan practices and consult advisers.
Our Questions for You
- If you run or are part of a family business, how would this proposed change affect your cashflow and how you draw funds from the business?
- Do you think the $50,000 threshold is a fair dividing line, or too low/high, for triggering loan-to-dividend conversion?
- Should there be exemptions for loans used for genuine business investment or for documented commercial loans to shareholders, rather than treating all loans the same?
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
