The Government has recently released a proposal that would fundamentally change how shareholder loans are taxed in New Zealand (Officials’ Issues Paper Improving taxation of loans made by companies to shareholders). At its core, the proposal could turn loans from a company to shareholders into a deemed dividend. Broadly, where a company advances funds to a shareholder and that loan is not repaid within a specified period, the outstanding balance would be treated as taxable income to the shareholder, most likely as a deemed dividend. This would apply to new loans made on or after 4 December 2025, with a proposed $50,000 de minimis per company (not per loan). This would mean that, for example, money taken out of a company by shareholders and left in an overdrawn current account could be treated as taxable income for the shareholders. Alongside this, Inland Revenue proposes a separate rule for companies that are removed from the Companies Register. Any shareholder loan still outstanding at the time of removal would be taxed at that point, on the basis that these loans are frequently never repaid and Inland Revenue has no practical way to recover tax once the company no longer exists. The stated problem: large loans that are never repaid Inland Revenue’s explanation for these changes relies on the concern that shareholders are taking funds out of the company, not declaring dividends, and not paying the funds back. The concern is not ordinary short-term lending. It is large shareholder loan balances that: build up over many years, fund private consumption, are never realistically repaid, and are often abandoned when a company is liquidated or removed from the register. From Inland Revenue’s perspective, these arrangements allow shareholders to enjoy company profits without ever paying shareholder-level tax, while IRD has (apparently) no effective recovery mechanism once the company disappears. That concern is understandable. However, the difficulty lies in how far the proposed solution strays from that original framing and the practical reality of how to implement the proposal. The $50,000 de minimis tells a different story Despite repeated references to very large balances and long-term non-repayment, the proposed rules would apply once shareholder loans exceed a $50,000 de minimis. This threshold applies to the company, so it will include all shareholder loans, not on a loan-by-loan basis. That threshold is not particularly high in the context of owner-managed businesses and does little to confine the rules to the behaviour Inland Revenue says it is targeting. In practice, the proposals could capture many ordinary commercial arrangements that bear little resemblance to the “never repaid” loans highlighted in IRD’s communications. New Zealand’s deliberate departure from Australia This tension becomes clearer when compared with Australia. Australia is cited as a model for taxing shareholder loans, but the Australian regime includes a critical safeguard: a commercial loan exemption. Where a shareholder loan is structured and documented on commercial terms, it is not treated as a disguised (or deemed) dividend. Inland Revenue has rejected adopting a similar exemption for New Zealand. The Issues Paper states that a commercial loan carve-out would be too easy to manipulate and would undermine the integrity of the regime. That decision has far-reaching consequences. It means that even a genuinely commercial loan, indistinguishable from third-party debt, remains exposed to the proposed deemed dividend rules purely because the borrower is also a shareholder. When a “loan” is taxed like income but still behaves like a loan Rejecting a commercial loan exemption also creates a series of unresolved technical and practical issues. If a shareholder loan is deemed to be income for tax purposes, but continues to exist legally, several questions follow: What happens to interest? Is this still taxable income for the company? Remember that, for tax purposes, the loan has been repaid via a deemed dividend. How are repayments treated? If the shareholder later repays the principal, should there be a deduction available to the shareholder for that repayment? i.e., to reverse the tax impact of the deemed dividend? What about future dividends? At this stage, the deemed dividend appears to be a tax fiction. The retained earnings remain in the company for accounting purposes. Unless the deemed dividend is matched by a reduction in retained earnings or tracked some other way, the same underlying profits could be distributed again later as an actual dividend — and taxed again in the ordinary way. What this would mean in practice From a practical perspective, the proposals would mean that overdrawn shareholder current accounts could be treated as taxable income for the shareholder, rather than simply being viewed as loans that remain outstanding. Inland Revenue has framed the changes around situations where large shareholder loans are not repaid, and shareholder-level tax is not ultimately collected. The proposed rules would apply more broadly than those scenarios, including to loans that are documented, interest-bearing, and intended to be repaid. As the proposals currently stand, further guidance will be needed on how deemed income amounts interact with ongoing loan balances, interest payments, repayments of principal, and future dividends funded from the same company profits. These interactions will be important in determining the overall tax outcome. If you would like to understand how these proposed changes could affect your business or existing shareholder loan arrangements, please get in touch with the team at NZ Tax Desk.  Disclaimer: The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both New Zealand tax rules and any relevant overseas tax systems before making decisions based on this content.