Government drops IRD proposal to tax big shareholder loans, seeks new advice on unpaid debts

Willis said stakeholders told Inland Revenue there was an issue with companies liquidating and shareholders being unable to repay loans, which they never paid tax on.

“That is a real issue,” Willis said.

“We’ve seen instances of businesses who were in that situation. [Ponsonby restaurant, now under new ownership] SPQR is a recent example.”

Willis said the Government would explore how to address the issue.

“But I’m really conscious we don’t want a hammer to crack a nut ... Our focus is on ensuring that small businesses in New Zealand have a predictable, stable tax environment.”

She said the Government wouldn’t forge ahead with the other proposal Inland Revenue consulted on – treating large shareholder loans from closely-held companies that weren’t repaid promptly as income, and taxing them accordingly.

Willis said stakeholders were generally unsupportive of this idea.

“Inland Revenue’s advice is now to drop that proposal. I agree,” she said.

Inland Revenue had questioned the extent to which companies were issuing shareholders loans, rather than paying them dividends, wages or salaries, to reduce their tax bills.

The Herald hasn’t seen the submissions to Inland Revenue’s consultation, nor the advice it gave the Government after its consultation.

Earlier in the week, Revenue Minister Simon Watts said ministers were still considering the “wide range of views” Inland Revenue received and hadn’t yet decided on next steps.

The Herald reported this on Wednesday, noting the proposal to treat large shareholder loans as taxable income if they weren’t repaid within a couple of years appeared dead in the water, with NZ First and Act opposing it.

While MPs from NZ First and Act shared their views on the proposal with the Herald, Watts – who is a National Party MP – declined the opportunity to do so.

After the story was published, the Herald asked Willis what she made of the situation.

She suggested her view wasn’t dissimilar to that of NZ First or Act.

She provided the commentary above and clarified: “The Government will not proceed with the proposal to tax shareholder loans that are not repaid within a certain time period.

“However, we are seeking further advice on unmanageable loans – that is, where shareholder loans are not likely to be repaid or are never repaid (such as when companies with outstanding loans are liquidated).”

NZ First deputy leader Shane Jones and Act leader David Seymour were broadly on board with this.

They were open to receiving advice on more targeted solutions to the issue around unmanageable loans, but weren’t up for suddenly treating a lot of debt as income.

Seymour said stakeholders had expressed strong opposition to this, including to him privately.

He said it was common for shareholders to end up paying income tax on the loans they received once their companies were in strong enough positions to write off this debt.

Jones believed Inland Revenue should look at whether the problems could be solved by tweaking receivership and liquidation laws.

In its consultation, Inland Revenue said shareholders owed 119,000 companies $29b in the year to March, 2024.

“About 5550 companies had outstanding loan balances of more than $1 million and 540 companies had outstanding loan balances of more than $5m,” it said.

“The data suggests that the amount of shareholder loans is generally increasing over time, but that the amount is also responsive to changes in the wider tax system (for example, changes in the trustee tax rate).

“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.”

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.