IRD said it was bringing the treatment of loans in line with other countries. (File photo) Photo: RNZ
Inland Revenue is planning to crack down on shareholders taking loans from companies, in a move that could hand some, particularly small businesses, an extra tax bill.
Inland Revenue (IR) is asking for feedback on proposals to improve the way new loans by companies to shareholders are taxed.
David Carrigan Inland Revenue deputy commissioner for policy, said it would bring New Zealand's treatment of loans in line with other similar countries, while still allowing the normal business use of short-term drawings.
"We recognise that most companies manage their loans to shareholders and drawings responsibly. However, the current rules can allow some loans to become unmanageable, to the point they may never be repaid. For instance, our data has revealed some very large outstanding loans from companies to their shareholders.
"For the 2024 tax year, IR data shows about 5,550 companies had outstanding loan balances of more than $1 million each.
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"When a shareholder borrows a large amount from their company and doesn't pay it back, our current rules mean they can pay less tax compared to other shareholders who receive taxable dividends or taxpayers who earn income through salary or wages."
The current rules often failed to collect tax on the funds left in the hands of the shareholder when a company was wound up, Carrigan said.
He said the main proposal was for a time limit that would treat certain shareholder loans as dividends, and tax them accordingly, if they were not paid back within 12 months from the end of the income year in which they were made.
"The change will only apply to new loans made after today, so it won't apply to existing loans. To ensure it does not impact small businesses and ordinary transactions, the proposed time limit would only apply to companies whose total lending to shareholders is $50,000 or more.
"In addition to this main proposal, the issues paper also consults on proposals for outstanding loans to be taxed when a company is removed from the Companies Register and for improved reporting obligations on companies."
Inland Revenue was going through a consultation period until February before it gives advice to ministers on the proposal.
Chartered Accountants Australia New Zealand spokesperson John Cuthbertson said there was "no doubt" there would be an impact on small businesses.
"The main problem here is that it applies to all loans once they're of a certain age and the de minimis is only $50,000 - that's for all shareholder loans.
"I don't think that de minimis is high enough to take the small bits and pieces out because it applies from anything from a shareholder current account to a formal documented loan… I guess what we'd like to see is if you've got a totally commercial loan and you've chosen to have that loan from your company rather than the bank or from somewhere else, that should still be appropriate and respected rather than being caught within these rules."
He said Inland Revenue was obviously not happy about people taking money out of their companies and building up balances beyond their ability to repay.
"Then they go out of existence and rather than being a temporary issue it's a permanent issue because there's no money to get back on liquidation or anywhere else. You can see the rationale. I just think this will have quite a wide impact so it's a matter of trying to work within the process to look to get some appropriate change to make it more workable."
Angus Ogilvie, managing director of Generate Accounting, said something did need to be done.
"Current rules provide a temptation for business owners to kick the can down the road by not clearing loans from companies to them as shareholders regularly.
"This means that personal income tax goes unpaid, often temporarily but in the case of business failure, often permanently. That said, it is concerning that the proposal is retrospective. The department seeks to capture any loans from today, December 5. Of course this means that no consideration of feedback to the Issues Paper has been received at this time, the minister has yet to agree with the proposal and no submissions can be made to a select committee until the bill is drafted.
"By ignoring the Generic Tax Policy Process, this puts the cart before the horse. The rules need to be as simple to follow as possible. That has not been the case in Australia so careful attention will be needed in drafting the bill and any interpretation statement. The department should back away from imposing an arbitrary date before receiving any feedback."
Deloitte tax partner Robyn Walker said the proposal made it clear loans were common and a legitimate way to manage cashflow, and "not a problem per se".
Deloitte tax partner Robyn Walker. (File photo) Photo: Supplied / Deloitte
"However, the paper cites data about loan balances, with the key concern relating to companies and shareholders with material loan balances which have been outstanding for some time.
"For example, 5500 companies have shareholder loans outstanding of over $1m and 540 have loans of over $5m. The concern is that the use of loans with limited/no repayment provides an unintended tax benefit as compared to paying shareholder salaries or declaring dividends, and the use of - in some cases poorly documented - loans can be a contributing factor to other business issues such as being unable to pay creditors or outstanding tax debt."
She said the impact would be most felt by small, family businesses.
"In some cases, there is a lot of blurring of the boundaries between business and personal expenses, particularly by using current accounts. The consultation paper indicates for around 50 percent of such businesses there is absolutely no issue because the outstanding loan balances are below the proposed threshold of $50,000; for the other businesses, 2026 should possibly be the year for talking with an accountant and putting in place a plan for managing how shareholders take money from the business.
"The paper points out that current accounts are not a problem in themselves, but it shouldn't be one-way traffic of a balance just getting larger and the shareholder never earning anything in their own right.
"While interest is charged on loans and tax generated on that income, it results in a generally lower amount of tax in the short term and different timing of tax compared to when other taxpayers are paying tax for those who have no ability to pick and choose such as sole traders, employees …"
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