Shareholder Loans in NZ: Tax Rules, Risks, and How to Stay Compliant

If you own and operate a company in New Zealand, you almost certainly have a shareholder current account — even if no one has ever explained what it is or why it matters.

Every time money moves between you and your company outside of a formal salary or dividend, it goes through this account. Pay a personal expense from the company card. Lend the company money to cover a slow month. Transfer funds to your personal account without classifying them. All of these create entries in the shareholder current account.

When the account is in credit — meaning the company owes you money — there are no immediate tax consequences. When it goes into debit — meaning you owe the company money — IRD's rules kick in, and the consequences can be significant.

This guide explains how shareholder loans work in New Zealand, what the tax rules are, and how to manage your current account correctly.

A shareholder current account (sometimes called a director's loan account) is a running ledger that tracks money flowing between a shareholder and their company.

Think of it like a tab at a bar. Every time you take money out of the company without it being classified as salary or dividends, the tab goes up. Every time you put money in — or the company pays you back — the tab goes down.

Credit balance: The company owes you money. This happens when you have lent money to the company, or when salary or dividends owed to you have not yet been paid out. No immediate tax issue.

Debit balance: You owe the company money. This is where the tax rules become important.

The most common causes of an overdrawn shareholder current account:

• Drawing more cash than your declared salary. If you pay yourself $80,000 in salary but transfer $120,000 out of the company account over the year, the $40,000 difference sits as a debit in your current account.
• Paying personal expenses through the company. Groceries, school fees, personal travel, home renovations — if the company pays for these and they are not classified as salary or a fringe benefit, they increase your debit balance.
• Unclassified transfers. Many business owners transfer money from the company account to their personal account without labelling it. At year end, the accountant has to classify these — and if there is not enough salary or dividend to cover them, the remainder becomes a loan.

If your shareholder current account is overdrawn — meaning you owe the company money — the company is effectively lending you money. IRD requires that either:

1. The company charges you interest at or above the IRD's prescribed interest rate (currently 8.41% for the 2025 income year), or
2. The company pays Fringe Benefit Tax (FBT) on the low-interest loan benefit

Most small companies do not charge interest on overdrawn current accounts, which means FBT applies. FBT on a low-interest loan is calculated on the difference between the prescribed rate and the rate actually charged (zero, in most cases).

The FBT rate for attributed benefits is 49.25% for shareholders who earn over $70,000 from the company. On a $50,000 overdrawn current account, the FBT liability can easily exceed $2,000 per year — every year the account remains overdrawn.

If your shareholder current account has been overdrawn for more than a year and the company has retained earnings, IRD may treat the overdrawn amount as a deemed dividend. This means:

• The amount is treated as if the company paid you a dividend
• Resident Withholding Tax (RWT) applies — typically 33%
• The company must file a dividend statement and pay the RWT to IRD

Deemed dividends are one of the more unpleasant surprises in small business tax. They can arise without any deliberate action on your part — simply from not keeping your current account tidy.

IRD looks at whether there is a genuine intention and ability to repay the loan. If the current account has been overdrawn for several years with no repayments and no formal loan agreement, IRD may take the view that the amounts were never really loans — they were distributions, and should be taxed accordingly.

The simplest approach is to ensure your current account stays in credit — meaning the company owes you money, not the other way around. This is achieved by:

• Declaring a salary that covers your actual drawings
• Documenting any personal expenses paid by the company as salary or fringe benefits
• Lending the company money when it needs cash, rather than drawing from it

Many owner-operators underpay themselves on paper to minimise PAYE, then make up the difference with unclassified drawings. This creates an overdrawn current account and the FBT and deemed dividend risks that come with it.

A better approach is to set your salary at a level that covers your actual cash needs, pay PAYE correctly, and treat the company's retained earnings as genuinely separate from your personal finances.

If you do have an overdrawn current account, document it properly:

• Loan agreement. A written loan agreement between you and the company, specifying the interest rate, repayment terms, and security (if any). This establishes that the arrangement is a genuine loan rather than an undeclared distribution.
• Interest payments. If the company is charging you interest, make sure the interest is actually paid or accrued — not just noted in the accounts.
• Repayment plan. A realistic schedule for repaying the loan. IRD is more comfortable with an overdrawn current account when there is a credible plan to bring it back to zero.

Your accountant should review your shareholder current account balance as part of the year-end process — before the accounts are finalised. This gives you the opportunity to:

• Declare additional salary to cover unclassified drawings (PAYE will be due)
• Declare a dividend if the company has sufficient retained earnings and imputation credits
• Formalise the balance as a loan with a proper agreement

Leaving it until after the accounts are filed limits your options significantly.

The rules also apply in reverse. If you lend money to your company — for example, to fund a capital purchase or cover a cash flow gap — the company owes you money, and the current account is in credit.

In this situation:

• You can charge the company interest. Interest paid by the company to you is a deductible expense for the company and assessable income for you personally.
• You do not have to charge interest. Unlike the overdrawn scenario, there is no FBT or deemed dividend consequence if the company does not pay you interest on a credit balance. You are simply choosing not to charge.
• The loan is an asset on your personal balance sheet. If the company fails, you are an unsecured creditor — meaning you rank behind secured creditors (like the bank) but ahead of shareholders in a liquidation.

There is no single right answer — it depends on your tax position, the company's imputation credit account balance, and your personal cash flow needs. Here is a brief comparison:

The most tax-efficient approach for most owner-operators is a combination of salary (enough to cover living costs and maximise imputation credits) and dividends (to distribute retained earnings efficiently). Your accountant can model the optimal split for your situation.

Ignoring the current account until year end. By the time your accountant flags an overdrawn balance, the FBT liability for the year may already be locked in. Review your current account balance quarterly.

Assuming personal expenses through the company are fine. They can be — but only if they are properly classified as salary, a fringe benefit, or a genuine business expense. Unclassified personal expenses are the most common cause of overdrawn current accounts.

Not having a loan agreement. If your current account is overdrawn by a significant amount, a formal loan agreement protects you if IRD ever questions whether the arrangement is genuine.

Mixing up the company's money and your own. The company is a separate legal entity. Its money is not your money. Every transfer between the two needs to be classified and documented.

Letting the balance grow year after year. A small overdrawn balance that is not addressed compounds — both in terms of the FBT liability and the risk of a deemed dividend assessment.

Sarah owns 100% of a company that turns over $800,000 per year. She pays herself a salary of $120,000 and draws an additional $60,000 from the company account over the year for personal expenses — school fees, a family holiday, and home renovations.

At year end, her shareholder current account is overdrawn by $60,000. Her accountant has two options:

1. Declare an additional $60,000 salary. PAYE applies at Sarah's marginal rate (39% on amounts over $180,000 — so roughly $23,400 in additional tax). The current account returns to zero.

2. Declare a $60,000 dividend. The company needs sufficient retained earnings and imputation credits. RWT of 33% applies ($19,800), but imputation credits from company tax already paid can offset this. Net additional tax may be lower than option 1 depending on the imputation credit balance.

3. Leave it as a loan. FBT applies on the low-interest benefit. At the prescribed rate of 8.41% on $60,000, the deemed interest is $5,046. FBT at 49.25% is approximately $2,485 — payable by the company, every year the balance remains.

Option 3 is rarely the right answer. Options 1 and 2 depend on Sarah's overall tax position and the company's imputation credit account — exactly the kind of analysis your accountant should be doing at year end.

Shareholder current accounts are one of the areas where small mistakes compound into large tax bills. The rules are not complicated once you understand them, but they are easy to ignore when you are focused on running a business.

The key habits are straightforward: classify every transaction between you and your company, review your current account balance regularly, and talk to your accountant before year end — not after.

At Eastmure & Associates, we work with company owners across Christchurch and Canterbury to keep their current accounts tidy and their tax position optimised. If your shareholder current account has been overdrawn for a while, or you are not sure how your drawings are being classified, get in touch — it is much easier to fix early than after IRD comes asking.