Companies involved in property would likely be most affected.
The change would only apply to companies owned by individuals or small groups of shareholders, as widely-held companies, partnerships and sole traders can’t use shareholder loans.
Inland Revenue couldn’t put a figure on how much more tax revenue it might collect if the Government forged ahead with its proposal.
Although the tax department is auditing more businesses and ramping up its efforts to collect unpaid tax, it said the point of the change would be to improve the fairness and integrity of the tax system, not generate more tax revenue.
Deloitte tax partner Robyn Walker agreed the proposal wasn’t a tax grab – rather, it was a way of unwinding something she believed was always too good to be true for some shareholders.
She believed it would also pull New Zealand into line with other countries.
Baucher Consulting tax consultant Terry Baucher dubbed the proposal a “genuine bombshell” with “huge ramifications”.
Meanwhile, the Taxpayers’ Union went so far as to claim it was “draconian” – and an attack on small businesses and farmers in particular.
“Even Muldoon would blush,” its executive director Jordan Williams said.
Inland Revenue is consulting with the public on its proposal. The feedback it receives will inform the advice it gives the Government, which will decide on how to proceed with any changes.
The details
Inland Revenue explained that companies controlled by a few shareholders often legitimately lend money to their shareholders.
While most companies manage these loans responsibly, some shareholders rack up large amounts of debt over many years.
Indeed, this can be advantageous to them.
While a shareholder will need to pay interest on the loan they receive from their company, and the company will need to pay 28% tax on this interest income, the shareholder won’t be taxed on the loan.
However, if the money were paid to them in the form of a dividend, salary or wage, they would need to pay tax on the funds at their marginal income tax rate, which could be as high as 39%.
In the 2024 tax year, about 5500 companies were owed more than $1 million by their shareholders. Of these companies, more than 540 were owed more than $5m.
Inland Revenue said, “We are concerned that the high value of shareholder loans suggests that our current rules relating to shareholder loans are less effective than rules in other jurisdictions at requiring the loan be repaid within a certain period of time or before the company goes out of existence.
“This can result in the tax advantage becoming a permanent advantage for the shareholder if the loan is never repaid.”
Inland Revenue said that in the six years to 2025, nearly 15% of all companies removed from the Companies Register were owed money by their shareholders at the time they were removed.
Collectively, shareholders owed these companies $2b.
Inland Revenue is proposing to treat loans like dividends if they aren’t repaid within 12 months after the end of the income year they were issued.
It wants this to apply to loans issued from December 4 this year onwards – meaning that if the law were changed, it would apply retrospectively.
To prevent the change from impacting small businesses and ordinary transactions, it would only apply to companies whose total lending to shareholders was worth $50,000 or more.
Inland Revenue is also proposing to tax loans once a company ceases.
Members of the public have until February 5 to provide feedback on the proposals.
The Government hasn’t committed to making any changes yet.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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