The aim is to close loopholes that allow some company owners to defer or avoid paying tax on funds borrowed from their businesses. The paper, titled Improving taxation of loans made by companies to shareholders, highlights growing concerns that the current rules create an unintended tax advantage for shareholders who borrow from their companies rather than receive taxable dividends. Inland Revenue estimates that as of 31 March 2024, nearly 119,000 companies were owed a staggering $29 billion by shareholders.

Why the current rules are under fire

Under existing law, shareholder loans generally do not trigger tax for the borrower unless interest is charged below a prescribed rate or the loan is forgiven. This contrasts sharply with dividends, which are taxed at the shareholder’s marginal rate (up to 39%) when paid. Inland Revenue believes this results in a system that is less fair, allowing some shareholders to access company funds for extended periods with a low tax cost for doing so.

Loans can remain outstanding indefinitely, and in some cases, they are never repaid – especially when companies fail. Nearly 15% of companies removed from the Companies Register between 2019 and 2025 had unrepaid shareholder loans, totalling $2.28 billion.

What is being proposed?

There are three key measures proposed in the officials’ issues paper:

1. Treating certain loans as dividends. New loans made on or after 4 December 2025 would be treated as taxable dividends if they exceed a proposed de minimis threshold (suggested at $50,000 per company) and are not repaid within a set timeframe.  Inland Revenue favour a 12-month period after the end of the income year in which the loan was made – similar to rules in Canada and the United Kingdom.
2. Taxing outstanding loans when companies are removed. Any shareholder loan still unpaid when a company is struck off the Companies Register would be treated as income for the shareholder at that time.  This rule would apply to existing loans and is intended to remove uncertainty about when income arises under current law.
3. Improved record-keeping and reporting. Companies would be able to maintain memorandum accounts for available subscribed capital and available capital distribution amounts, similar to the imputation credit system.

Is NZ alone with this issue?

New Zealand’s approach to shareholder loans is more lenient than many comparable jurisdictions. Australia taxes loans as dividends unless they are repaid or properly documented within 10 months, with strict conditions for long-term repayment. The United Kingdom imposes a 33.75% tax on loans not repaid within nine months, while Canada taxes loans outstanding beyond 12 months at the shareholder’s marginal rate. 

Why it matters?

Inland Revenue estimates that shareholder loans have grown at an average rate of 8.7% per year since 1997, faster than the economy itself. The prevalence of large loans raises equity concerns, as shareholders who borrow from their companies can seemingly defer tax for years, whilst employees, sole traders, and partners pay tax immediately on their income. Media coverage of company failures often highlight large shareholder loans alongside unpaid PAYE and GST, undermining public confidence in the tax system. The other concern is that shareholders with low reported income due to unrepaid loans may qualify for income-tested benefits or services they would not otherwise receive. 

Impact on business

Inland Revenue acknowledges the proposals could increase compliance costs. However, the suggested de minimis threshold of $50,000 is intended to exclude small, routine borrowings. Inland Revenue is  considering exceptions for loans made in the ordinary course of a lending business and under employee share schemes.  Existing loans would not be immediately affected unless their terms are materially varied after 4 December. However, they would count toward the de minimis threshold when determining whether new loans are subject to the proposed rules.

Comment

There is much to unpack here.

We question the premise of the proposals – while there could be some further work done on the tax treatment of shareholder balances upon the liquidation of companies; there is a minimal long term tax benefit from proving an interest free shareholder loan versus simply paying the higher rate of tax upfront. This is because any deemed dividend is taxable in the hands of the shareholder, whilst not being deductible in the hands of the company, so results in any tax benefit being wiped out within around six years.

It is also worth noting that whilst shareholder loan balances had been growing in the years leading up to 2022, since 2022 the balance of outstanding shareholder loan balances has almost halved – and while Inland Revenue makes the argument that the introduction of the 39% tax rate for trusts was the main contributing factor, there were not similar downward movements following an increase in other tax rates (particularly the introduction of the 39% top personal tax rate in 2000 and then again in 2021).

We welcome the ability for companies to report available subscribed capital and available capital distribution amounts – it is very difficult for companies to determine these balances, especially going back several decades and where advisors or shareholders have been changed. By including available subscribed capital and available capital distribution amounts in the income tax return, this provides a permanent record that would be maintained across time. We also welcome proposals to reassess the taxation treatment of outstanding shareholder loans on liquidation.

Inland Revenue has provided two months for submissions, with submissions closing on 5 February 2026. This indicates a genuine desire to engage with the business community and their advisors. Baker Tilly Staples Rodway will be making a submission, and we look forward to receiving your thoughts. If you have any questions or would like to make a submission of your own, please contact your Baker Tilly Staples Rodway advisor.

Uber’s contractor model is not above scrutiny

The decision by the Supreme Court that four Uber drivers were in fact employees and not independent contractors has been widely publicised.

The Supreme Court concluded that Uber exercised close control over the work of the drivers. This included controlling the fares charged, the operation of a ratings system (which included automatic de-activations, sanctions for rejecting rides and mandatory training after complaints) and general oversight over aspects such as routes taken by the drivers. But for legislative change currently going through Parliament, this case would have been a significant blow to businesses such as Uber, who have fostered the creation of the gig economy.

It will be interesting to see whether Inland Revenue pursues any action following this.  As the Supreme Court has ruled the Uber drivers were employees, there was an obligation for Uber to account for PAYE on amounts paid to the drivers. In turn, the drivers were unable to claim a deduction for any expenditure incurred. In addition, it could be argued there are broader income tax and GST consequences to this.

The line separating independent contractors from employees has always been a thin one and getting this wrong not only has employment law consequences but also taxation consequences – and potentially for all parties. Baker Tilly Staples Rodway have a specialist Human Resources team who can help with day-to-day Human Resources issues.

OECD updates guidance on home office and cross-border tax impact

The OECD has released an update to the Model Tax Convention on Income and on Capital, providing new and detailed guidance on short-term cross-border remote work and on the taxation of income from natural resource extraction. OECD commentary on whether a home office gave rise to a permanent establishment, and therefore an offshore income tax obligation for the employer, had been last reviewed in 2018 and so predated the massive uptake in remote work since 2020.

Previous guidance had been minimal and was generally viewed as giving carte blanche to employees setting up home offices remotely without giving rise to a permanent establishment. While in many cases, the result was appropriate (for example, a back-office employee who chooses to work from home in another jurisdiction), there was the possibility of inappropriate results arising.

The new guidance is considerably more detailed, and comes to several broad conclusions:

• Where a home is used for less than 50 per cent of their total working time for an enterprise over the course of any twelve-month period, then the home would generally not be seen as a place of business
• A commercial reason for the activities undertaken by the employee is a key consideration in whether a home office creates a fixed place of business, and therefore a permanent establishment.
• Examples of commercial reasons include where the employee is based in the other country to directly engage with customers, suppliers, associated enterprises or other persons on behalf of their employer.
• Where an employer allows employees to work from home simply to reduce costs generally means there is not a commercial reason for operating from a home office.

If your business has cross-border employees or are thinking of allowing your employees to work cross-border, we recommend seeking advice from your Baker Tilly Staples Rodway advisor.

Beware the tax grinch

As the Andy Williams song goes, Christmas is the most wonderful time of the year, and while there will be parties for hosting and hearts will be glowing, unfortunately not everything is of good cheer when it comes to tax.

Most will be familiar with the long-standing entertainment regime, which means that expenditure on Christmas parties, end of year lunches and the summertime barbecues is only 50% deductible for income tax purposes, with a corresponding GST adjustment being required once the income tax return has been filed.

Sometimes forgotten is that some years ago, Inland Revenue concluded that gifts of food and drink were also part of the entertainment regime on the basis that it was expenditure on food and drink provided off business premises and not subject to the exemptions to the rules. Therefore, such gifts provided by businesses to customers and suppliers would also only be 50% deductible for income tax purposes. Where a gift containing a combination of food, drink and other items (e.g. a hamper which might include a tea towel) the apportionment between items is required to identify the 50% deductible food and drink components.

Finally, thank you for taking the time this year to read our Tax Talk articles as they are released. We would like to wish you, your teams, families and friends a Merry Christmas, a Happy New Year, and we look forward to keeping you informed in what promises to be a busy year.