Business owners need to pay attention
Inland Revenue has released an officials’ issues paper proposing a significant change to how shareholder loans are taxed. If adopted, these changes could result in unexpected income tax bills for shareholders who do not repay loans within a strict timeframe.
What is a shareholder loan?
A shareholder loan arises when a company provides funds to a shareholder other than by salary or dividend. Common examples include:
- An overdrawn shareholder current account
- Personal expenses paid from the company bank account or credit card
- Cash withdrawn from the company without a formal dividend being declared
- A formally documented loan from the company to the shareholder
In simple terms, if you take money out of your company and it is recorded as “owing back” to the company, that is a shareholder loan.
What is Inland Revenue proposing?
Under the proposal, new shareholder loans would be treated as a dividend if:
- The total shareholder lending exceeds a de minimis threshold (likely around $50,000), and
- The loan is not fully repaid within 12 months.
This would apply regardless of whether the loan is formally documented or simply sits in an overdrawn current account.
Why does this matter?
A dividend is taxable income to the shareholder.
If a shareholder loan is reclassified as a dividend:
- Income tax will apply at the shareholder’s marginal tax rate (up to 39%)
- This can result in a substantial tax liability, often with no cash available to pay it
- The tax outcome may be very different from what was originally intended when the funds were withdrawn
Inland Revenue’s clear policy intent is to remove the ability for shareholders to access company funds long-term without paying personal tax.
Existing loans and company closures
While the proposal primarily targets new loans, Inland Revenue is also proposing that:
- Any outstanding shareholder loan will be treated as income when a company is removed from the Companies Register
This is particularly relevant for companies that are dormant, being wound up, or struck off with unresolved shareholder current accounts.
Why this matters when a company is removed from the Companies Register
Inland Revenue is also proposing that any outstanding shareholder loan will be treated as taxable income to the shareholder when a company is removed from the Companies Register. This is a significant change. At present, many shareholders assume that once a company is struck off, the debt effectively disappears with the company.
Under the proposal, that would no longer be the case. Instead, the unpaid shareholder loan would crystallise as personal income, meaning the shareholder becomes personally liable for the resulting income tax. In practical terms, the company will not simply vanish into oblivion with the debt. Inland Revenue will follow the value and tax it in the shareholder’s hands.
What should business owners do now?
Even though this is currently a proposal, Inland Revenue has signalled strong concern about shareholder loans and has indicated the rules may apply from the date of enactment, not retrospectively negotiated later.
Business owners should:
- Review shareholder current accounts now
- Understand whether amounts taken are genuinely short-term
- Consider repayment strategies, dividends, or remuneration planning
- Avoid assuming that informal or long-standing arrangements will continue to be acceptable
We can help
If you:
- Have an overdrawn shareholder current account
- Regularly take drawings from your company
- Are unsure whether amounts taken could be treated as a shareholder loan
- Are planning to close, sell, or restructure a company
You should seek advice now.
We regularly advise business owners on shareholder loan management, dividend planning, and Inland Revenue compliance. Early advice can prevent costly tax outcomes later.
📞 Contact us to discuss your situation and ensure you are prepared for these changes.