Changes needed to IR’s shareholder loans proposals

In a detailed submission to IR’s consultation paper “Improving taxation of loans made by companies to shareholders” released in December last year, CPA Australia noted it broadly supported the IR’s proposed reforms aimed at stamping out the improper use of company loans to avoid tax.

IR has proposed that a new time limit rule be introduced that would treat certain shareholder loans as dividends if they were not repaid within 12 months from the end of the income year in which they were made.

Having a repayment time limit follows a similar approach to other countries, including the UK, Canada and Norway. Australia’s Division 7A rules impose a time limit of seven years for unsecured loans and 25 years for secured loans. They also require that money accessed by shareholders from private companies is structured as a complying loan or treated as an unfranked dividend.

IR’s proposal would apply to new loans from 4 December 2025, not existing ones, and only when a company’s total lending to shareholders is $50,000 or more.

Addressing tax shelters

IR’s time limit proposal seeks to address exploitation of the significant gap between New Zealand’s 28 per cent company tax rate and its 39 per cent top marginal tax rate. 

This gap can incentivise tax sheltering, whereby individuals draw out income from their companies as a low-interest or interest-free loan instead of paying themselves dividends that would be taxed at their higher marginal tax rate. Some shareholders have no intention of repaying their loans.

IR’s Deputy Commissioner Policy, David Carrigan, noted that about 5,550 New Zealand companies had outstanding loan balances of more than $1 million each in the 2024 tax year.

Avoiding unnecessary complexity

CPA Australia Tax Adviser, Bill Leung, says that with IR expected to make its recommendations to the New Zealand Government this month, before the 2026 Federal Budget is delivered on 28 May, the regulator should avoid introducing unnecessary complexities and creating higher compliance costs for small and medium enterprises.

Leung also warns that IR needs to avoid any prospect of individuals and companies being double taxed. This could occur if shareholder loans older than 12 months are treated as dividends and liable for personal tax to the shareholder, while loan interest paid back to a company is also treated as taxable company income.

“If IR is going to deem a loan as a dividend after 12 months, there has to be a mechanism to recognise this and offset the same amount from the loan so there’s no double dipping of tax,” he says.

Leung adds that IR should instead specifically target shareholder loan arrangements that are not on arm’s length commercial terms, which are often undocumented and lack security or repayment obligations.

“In many small businesses, people’s whole lives revolve around running the business; they plough everything into it, and there will be times when they need to draw on it to live,” he says.

“Some people will do the wrong thing, but others will do the right thing and have a proper loan agreement, charge a commercial rate of interest and make principal repayments.

“So, we’re saying you can’t just tax everyone, and you have to exclude people who are doing the right thing on commercial terms, even if they pay back a loan beyond 12 months,” Leung says.

CPA Australia’s submission also points out that IR’s proposed $50,000 de minimis threshold could inadvertently encourage taxpayers to legally withdraw company funds for private use up to this limit. To avoid this, the “complying loans” mechanism in Australia is seen as a more commercial and pragmatic approach.

Other key points:

• Challenging the “unintended advantage”: While IR proposal suggests current rules provide an unintended tax advantage, CPA Australia’s submission noted that if existing laws (such as base price adjustments upon a company’s strike-off) are applied correctly, this would ensure overdrawn loans could not escape tax. The current rules often fail to collect tax on the funds left in the hands of a shareholder when a company is wound up.
• Inclusion of non-residents: CPA Australia supports extending the new rules to non-residents of New Zealand to ensure consistency across the tax system.
• Extending to associates: CPA Australia has recommended the rules should also apply to associates of shareholders to prevent tax-sheltering behaviour through family members or related entities, and to cover the private use of company assets, ensuring value transfers cannot be easily bypassed and there is comprehensive tax treatment.
• Trust and corporate beneficiary issues: CPA Australia recommends the rules capture complex scenarios, where trusts make unpaid distributions to corporate beneficiaries, and funds are instead subsequently loaned to shareholders or their associates.