Possibly in the hope that people would miss it in the Christmas rush, in December Inland Revenue (IR) released an Issues Paper proposing significant changes to the tax treatment of loans by companies to shareholders, including overdrawn shareholder current accounts. With submissions now closed, we are waiting to see whether the Government will advance these controversial proposals.

What's being proposed?

The main proposal would treat loans by companies to shareholders as deemed dividend income if they exceed a suggested de minimis of $50,000 (aggregate loans to all shareholders) at tax year end, and continue to exceed the de minimis at the following tax year end.

For example, if a shareholder's current account was overdrawn by more than $50,000 on 31 March in Year 1 (say $100,000), and it remained overdrawn by (say) $120,000 on 31 March in Year 2, then our interpretation of the proposal is that company would be deemed to pay a $100,000 dividend to the shareholder on that date. For tax purposes the current account balance would be treated as reduced to $20,000, but commercially the shareholder would still owe the company $120,000.

IR leans towards allowing imputation credits to be attached to the deemed dividend.

Critically, if progressed the proposed rules would apply to any loans made on or after 4 December 2025 (the date the Paper was published), meaning business owners should think about tracking new loan activity separately from pre-existing balances.

Why is IR concerned?

The Paper reveals that approximately 119,000 New Zealand companies were owed nearly $29 billion by shareholders in the 2024 tax year. IR's data shows:

• About 5,500 companies had loan balances exceeding $1 million.
• 540 companies had balances above $5 million.
• From 2019 to 2025, almost 15% of liquidated companies were owed funds by shareholders at dissolution (totalling $2 billion).

IR argues that shareholders that borrow from their companies enjoy a significant timing advantage over those who instead receive regular taxable dividends and/or shareholder salary, even when interest is charged at the IR prescribed rate. In cases where companies are liquidated with unpaid shareholder loans, IR suggests the operation of existing debt remission rules is inadequate and the timing advantage often becomes permanent.

Our view

Simpson Grierson filed a submission urging Inland Revenue to test its economic assertion as to the timing advantage, particularly for shareholders paying market interest rates on their drawings.

However, our submission focused on some of the practical implications if the proposal proceeds, including:

• Risk of effective double taxation: A loan balance deemed to be a dividend for tax purposes would continue to exist commercially and may be repaid by the shareholder later.
• Cross-border complexities: Additional complications would arise where the company is in New Zealand and the shareholder offshore (or vice versa).

What happens next?

The consultation period for the Paper has closed, and we expect the proposal will be facing vociferous opposition from the majority of submitters. The real question is whether the Government would have an appetite to push forward with a legislative process, particularly in an election year.

There are echoes of a March 2022 Issues Paper dealing with other ‘dividend integrity’ concerns, which (among other matters) included a highly contentious proposal to tax sales of shares in companies to the extent the company has retained earnings at the time of sale. That paper was pilloried by submitters and commentators and quickly abandoned due to its political toxicity.

We will continue to monitor developments and will update clients as the Government's position becomes clear.

Get in touch

Please get in touch if you’d like more information or to talk to one of our tax experts about what this means for your business