Proposal to tax shareholder loans

Inland Revenue (IR) has released an issues paper proposing a significant shift in the taxation of loans by companies to their shareholders. Shareholder current accounts and drawings are a normal part of cashflow management for many owner-managed businesses. However, IR is concerned that long-standing and large balances can deliver an unintended tax advantage compared with paying dividends or salary.  

Proposed new treatment 

Under the proposal, if a loan made by a company to a shareholder is not repaid within 12 months after the end of the income year in which it was made, it would be treated as a taxable dividend. If repaid within the timeframe, there would be no tax to pay on the principal amount. The proposed new rule will apply:  

• To loans made on or after 4 December 2025 (existing loan balances are intended to be outside the time limit unless there is new lending). 

• When the company’s total lending to shareholders is $50,000 or more (a proposed de minimis threshold). 

How shareholder loans are currently taxed  

When a shareholder loan is advanced, the principal amount is not taxed upfront. Instead, tax consequences arise over time, for example when the company pays tax on interest charged to the shareholder, or when fringe benefit tax or deemed dividend rules apply to low-interest or interest-free loans.

In practice, many owner-managed businesses use an overdrawn shareholder current account that is periodically repaid or offset with dividends or shareholder-employee salary. Under current rules the loan balance will usually only become taxable if the company forgives the loan.  

Why Inland Revenue is looking at this now 

IR’s published data indicates that large shareholder loan balances are more common than would be expected. IR has highlighted that, for the 2024 tax year, about 5,550 companies had outstanding shareholder loan balances of more than $1 million each. IR’s concern is that these shareholder loans are providing long-term access to company profits, without the immediate personal tax cost that would apply to dividends or salary. 

Potential issues and practical concerns 

As with most tax reforms the policy objective seems simple, but getting to the rules that achieve that objective is complex. IR acknowledges that this tax proposal creates several extremely complex interactions with existing tax rules. It will require several potentially complex anti-avoidance rules to prevent the policy intent being circumvented.  

IR advances its proposal on the basis that shareholder loans provide companies with a tax advantaged means to make their profits available to shareholders. However, not all longstanding loan balances are motivated by this potential benefit. Many owners use drawings to smooth personal cashflow. Overdrawn current accounts may also reflect a mismatch between the cash available to shareholders to draw and the taxable income of the company (for example, due to the company having large depreciation deductions). A fixed time limit may force distributions at inconvenient times or push businesses into short-term refinancing. Some loans are genuine commercial loans by the company to shareholders to fund shareholders private or income-earning activities. If a loan is deemed a dividend for tax, the shareholder may face a personal tax bill without having the cash to pay it, due to the borrowed funds being spent or tied up in an asset. 

Implications for shareholders and closely held companies 

If progressed, the proposal would shift shareholder loans from a “manage over time” issue to a “repay or tax” issue. This means shareholders may need more deliberate annual planning around drawings, salaries and dividends to avoid tripping the time limit. Shareholders with large personal borrowings from their company may face accelerated personal tax costs, particularly where loans fund lifestyle assets or long-term investments. 

What should business owners do now? 

Nothing has been decided yet. Consultation closed on 5 February 2026, and any law change would require a legislative process. However, now is a good time to review your current position and tidy up any risk areas, for example: 

• Review shareholder current account balances and how they have moved over the last 2-3 years.  

• Document loan arrangements (even for drawings) and agree a realistic repayment plan where balances are building. 

• Check whether interest is being charged appropriately and whether the FBT or deemed dividend rules might already apply. 

• Consider whether a regular salary/dividend strategy would better match your cashflow and reduce compliance risk. 

We’re here to help. If you would like to discuss how this proposal may affect your shareholder loan accounts, please get in touch with your advisor or reach out to our Tax team. 

Disclaimer: 

Findex NZ Limited trading as Findex. 

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex 

While all reasonable care is taken in the preparation of the material in this article, to the extent allowed by legislation Findex accepts no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex assumes no obligation to update this material after it has been issued. You should seek professional advice before acting on any material. 

October 2025