Inland Revenue Consultation: Taxation of Shareholder Loans

On 4 December 2025, Inland Revenue released an issues paper proposing significant changes to the way shareholder loans are taxed in New Zealand. These reforms aim to close gaps in the current system and ensure fairness across different business structures.

Why the change?

• Shareholder loans are widely used in small businesses and close companies to manage cashflow.
• Current rules often allow shareholders to access company funds with lower tax costs compared to dividends or salaries.
• Inland Revenue data shows outstanding shareholder loans total nearly $29 billion, with thousands of companies holding balances over $1 million.
• When companies are wound up, unrepaid loans can escape taxation, undermining fairness and revenue integrity.

Key proposals in detail
1. Loans treated as dividends if not repaid

• New loans made after 4 December 2025 would be treated as dividends if not repaid within a set timeframe (12 months being proposed).
• A de minimis threshold (suggested at $50,000 per company) ensures small, short-term cashflow lending is unaffected.
• Exceptions may apply for genuine commercial arrangements, but Inland Revenue wants clear rules to prevent avoidance.
• This aligns New Zealand with international practice — for example, Australia’s Division 7A rules.

2. Outstanding loans taxed when company ceases

• If a company is removed from the Companies Register with shareholder loans still outstanding, those balances would be treated as shareholder income at that point.
• This closes the current gap where loans can effectively “disappear” when a company is wound up, leaving tax unpaid.
• Inland Revenue estimates that over $2 billion of shareholder loans were unrepaid when companies were removed between 2019–2025.

3. Improved record-keeping & reporting

• New requirements for tracking Available Subscribed Capital (ASC) and Available Capital Distribution Amount (ACDA).
• These measures will support compliance, audit, and transparency, ensuring companies and shareholders can’t exploit gaps in reporting.
• Inland Revenue is also exploring non-legislative solutions to strengthen collection processes when companies are deregistered.

Implications

• Greater equity between shareholders, employees, and sole traders.
• Stronger incentives to repay loans promptly.
• Potentially more funds retained in companies for reinvestment, reducing liquidation risks.
• Increased confidence in the fairness of the tax system.

Submissions invited
Inland Revenue is seeking feedback by 5 February 2026. Businesses, advisors, and stakeholders are encouraged to share views on the proposals and their practical impact.

Personal commentary
In our experience as advisors, shareholder loans are often used responsibly to smooth short-term cashflow or bridge timing gaps. They can be a practical tool for small businesses. However, the Inland Revenue data highlights the scale of unrepaid balances — sometimes in the millions — which points to systemic issues.

The challenge will be striking the right balance: ensuring fairness and integrity in the tax system while preserving flexibility for genuine business needs. For directors and shareholders, this consultation is a timely reminder to review funding practices, governance, and repayment strategies.

Takeaway: These reforms could reshape how closely-held companies manage shareholder funding. If you’re a director, shareholder, or advisor, now is the time to engage with the consultation process.