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Shareholders who borrow money from their company and don’t repay the loan after the business has been liquidated or removed from the Companies Register will have to pay income tax on it.
The change, made as part of Budget 2026, is expected to raise $146 million in total for the Government over the forecast period to 2029-30, with the peak impact in 2028-29 at $44m.
Minister for Revenue Simon Watts said it was unlikely such loans would ever be repaid so it was effectively income to the former shareholder.
“Not taxing it is unfair to all the other New Zealanders who pay income tax and contribute to the costs of public services,” Watts said.
The Government sought advice on the tax treatment of loans to shareholders that are unlikely to be repaid between December 2025 and February 2026.
Inland Revenue (IRD) consulted on the initiative, and 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 $2.3 billion.
The Government previously ruled out an IRD proposal to tax some large company loans to shareholders that aren’t repaid within a certain timeframe.
Baker Tilly Staples Rodway head of taxation Mike Rudd said the Budget change closed a loophole that had been around forever.
“There have always been ways to counter it but Inland Revenue haven’t really pushed it too hard. I think it’s a good outcome and a fair outcome, particularly given the discussion document they had last year which proposed a lot more draconian measures than they finally landed on. So this is quite sensible,” Rudd said.
However, Rudd said, the change would also alter the behaviour of business owners to create another loophole.
“This creates the incentive to rather than move to strike your company off, just let it linger on as a zombie. They’ve actually crystallised that tax that might be payable.
“I think the Government might be a bit over-optimistic in their revenue targets on that one because it seems like a relatively easy thing to fix or to avoid or defer. Unless there’s some specific measures in there that we haven’t seen yet, but, as always, the devil’s in the detail on how that works.”
Rudd said Inland Revenue was aware of operators stripping companies of their value just as they deteriorate, and the initiative would make it easier for the IRD to go after them.
He added that the change may create tension between liquidators and the IRD as to who has access to a company’s assets, where previously the IRD might have been restricted to just the company itself.
Waterstone Insolvency principal Damien Grant said there was a very small number of rogues who rort the system.
“This mechanism will not catch the professional rogues but will harass into bankruptcy those who are already facing the economic and social stigma of a business failure,” Grant said.
“From my experience, directors of failed companies are financially and psychologically ruined by the time their enterprise falls into liquidation.
“The reason why directors and shareholders take drawings or loans from their companies is because they have no other means of paying for their households. These are sad stories of individuals who have tried to build a business and have failed.”
Grant said the IRD was sitting on $9.3 billion in overdue debt, and should focus on enforcing the rules it currently had.
The IRD is receiving $60m over the forecast four-year period to invest in its debt compliance activities, expanding on similar investments made in Budget 2024 and 2025.
However, the IRD was also required to find efficiency savings through reductions in back-office expenditure and frontline productivity improvements, totalling $63.2m over the forecast period.
Meanwhile, the Official Assignee’s office, which enforces the recovery of outstanding debts will see its funding decrease from $24.6m in 2025-26 to $22.2m for 2026-27.
Do you have questions about the Budget? Ask our experts – business editor at large Liam Dann, senior political correspondent Audrey Young and Wellington business editor Jenée Tibshraeny – in a Herald Premium online Q&A here at nzherald.co.nz at 9.30am, Friday, May 29.
Tom Raynel is a multimedia business journalist for the Herald, covering small business, retail and tourism.