A common year-end exercise for many companies is to tidy up shareholder current accounts. Often, that means little more than reviewing balances that have built up through drawings, reimbursements, or short-term funding needs. Those arrangements that have existed, largely unchanged, for years.

Against that backdrop, Inland Revenue released an issues paper just before Christmas proposing changes to the taxation of companies lending to shareholders. The proposals are wide-ranging and, for many, unsettling. Of particular concern is the suggestion that the measures could apply from the date of publication - 4 December 2025.

The proposed changes would apply to any lending from a company to its shareholder or shareholders, including overdrawn current accounts and informal lending arrangements.

Inland Revenue concerns

Inland Revenue is concerned that taxpayers operating businesses through companies may be able to take money out of the company tax free.  

In simplified terms, company profits are taxed at 28%.  Profits paid out as a dividend are taxed at the shareholder’s marginal rates, usually up to 39%.  Imputation credits will cover 28% but the shareholder will need to pay the rest.

If the shareholder borrows the money from the company instead, the shareholder has received the cash but is not liable for the additional tax.

That simplified explanation deliberately ignores several existing features of the tax system:

• The shareholder will ultimately be taxed when profits are distributed, (unless the eventual distribution is a capital gain paid out on liquidation), meaning the tax is deferred rather than avoided;
• The deemed dividend rules require the company to return a notional amount of interest, which is generally added to the loan, causing compounding over time;
• The FBT rules prescribe the interest rate, usually at or slightly above market;
• The company must return cash tax on the interest, but the interest is usually not deductible to the shareholder.

CA ANZ believes the above safeguards are sufficient to prevent abuse except in cases of deliberate avoidance, which would in any event be subject to the general anti-avoidance rule in section BG 1.  Inland Revenue officials appear to take a different view.

Proposed solutions

The Issues Paper proposes three solutions:

1. Requiring certain shareholder loans to be treated as dividends for tax purposes after a prescribed time period;
2. Deeming a base price adjustment (BPA) to be required on outstanding shareholder loans when the company goes into liquidation;
3. Requiring companies to report their Available Subscribed Capital (ASC) and Available Capital Distribution Amount (ACDA) to Inland Revenue annually.

Of these, the first would have the most impact on genuine commercial arrangements.

1. Treating shareholder loans as dividends

Under the proposals, outstanding loans would be deemed dividends to the shareholder.  This may be sensible in some cases; however, thresholds are important.  The Issues Paper proposes any loan over $50,000 and outstanding for longer than a year would be subject to this treatment.

In CA ANZ view, this amendment is not necessary.  The combined effect of the existing deemed dividend and FBT rules provides adequate protection. If changes are to proceed, the proposals require substantial reworking. At a minimum, any threshold should be significantly higher, and the rules should be better targeted to situations involving genuine tax avoidance.

2. Deemed shareholder income on winding up

The second proposal would treat any shareholder loan that remains outstanding at the time the company is removed from the Companies Register as income of the shareholder.

CA ANZ agrees with this proposal, provided the shareholder has been released from the obligation to make payment.  Current legislation already requires a BPA to be performed, although Inland Revenue appear to have concerns around the trigger point and certainty of timing.  The proposed rule is intended to provide greater timing certainty and is likely to advance the BPA trigger point.

3. Record-keeping and reporting requirements

The issues paper also proposes that all companies would need to calculate and report their available subscribed capital (ASC) and the available capital distribution amount (ACDA) annually.

CA ANZ considers this would impose unnecessary compliance costs, requiring taxpayers to verify calculations that may never be needed.  This proposal should not proceed.  If it does, movements for the year would need to be treated as a tax position and subject to the statute bar in the same way as other return positions.

Inland Revenue tax debt

It is no secret that Inland Revenue has a large book of outstanding debt and is currently very focused on collecting it and preventing further growth.  They have growing concerns where excessive shareholder lending has contributed to putting company viability at risk.  Officials are additionally concerned about shareholder distributions framed as lending where there is no real intention of repayment. A desire to address these behaviours is understandable, however the proposals as drafted go too far. If they proceed in any form, they must be reworked to focus on genuine cases of tax avoidance rather than applying to all shareholder loans and current accounts.