A potential tax reform is on the horizon, and it could significantly impact family-run businesses. The proposed change aims to address a loophole that allows some shareholders to avoid paying taxes on large loans from their companies.
Inland Revenue (IR) is seeking feedback on a plan to reform the taxation of loans made by companies to shareholders. David Carrigan, the deputy commissioner for policy at IR, explains that this move is necessary to align New Zealand's practices with those of similar countries, while still allowing for the standard business practice of short-term drawings.
But here's where it gets controversial... IR's data reveals some concerning trends. For instance, approximately 5550 companies had outstanding loan balances exceeding $1 million each for the 2024 tax year. When a shareholder borrows a substantial sum and doesn't repay it, they can potentially pay less tax compared to other shareholders who receive taxable dividends or taxpayers earning income through salaries or wages.
The current rules often fail to collect taxes on funds left with shareholders when a company is wound up. To address this, IR proposes a time limit: shareholder loans that remain unpaid for more than 12 months from the end of the income year in which they were made will be treated as dividends and taxed accordingly.
And this is the part most people miss... The proposed change will only apply to new loans made after the announcement, so existing loans won't be affected. To ensure it doesn't burden small businesses, the time limit will only apply to companies with total lending to shareholders of $50,000 or more.
In addition to this main proposal, IR is also consulting on taxing outstanding loans when a company is removed from the Companies Register and improving reporting obligations for companies.
Deloitte tax partner Robyn Walker highlights that loans are a common and legitimate way to manage cash flow, but the concern arises when loan balances become substantial and remain outstanding for extended periods. She emphasizes that the impact of this reform will be most keenly felt by small, family-run businesses, where the boundaries between business and personal expenses can often blur.
So, what's the takeaway? This proposed tax change aims to address a potential tax loophole, but it also underscores the importance of clear boundaries and responsible financial management in family businesses. It's a complex issue, and we'd love to hear your thoughts in the comments. Do you think this reform is necessary, or are there alternative approaches that could achieve the same goal without impacting small businesses?
