Home > Updates > Closing your company? Don’t get caught by the shareholder current account tax trap
For New Zealand’s SME’s, a shareholder current account represents money that a shareholder puts into or takes out of a company. Sometimes the current account will become overdrawn resulting in the shareholder owing the company.
Generally, no tax issues arise from an overdrawn shareholder current account provided the company charges interest on the overdrawn current account at Inland Revenue’s prescribed interest rates. If Inland Revenue’s prescribed interest rates are not applied, and the shareholder current account remains overdrawn at year-end, deemed dividend or fringe benefit tax issues could arise, depending on whether the person is a shareholder or a shareholder-employee.
If an overdrawn shareholder current account is written off before a company is wound up, taxable income (referred to as ‘debt remission income’) will arise to the shareholder at the time of write off.
As it currently stands, if an overdrawn shareholder current account is not dealt with before a company is wound up, this could also give rise to taxable income of the shareholder, however it was not clear when this income arose. Accordingly, it appears sometimes this was never taken up as taxable income.
Recent legislative changes to the Income Tax Act 2007 now clearly establish the timing of the debt remission income where an overdrawn shareholder current account remains unpaid after a company is liquidated or removed from the Companies Office register.
The new tax rules are the result of initial proposals announced by Inland Revenue in December 2025 to treat overdrawn shareholder current account balances as taxable if they were not repaid within a set period, regardless of whether the prescribed rate of interest was being charged on the outstanding balance. See our article from last year on proposed change in tax treatment to shareholder loans here.
The new tax rules, while scaled back from the initial proposals, will apply to any company removed from the Companies Register on or after 4 December 2025.
The new tax rules state that if an overdrawn shareholder current account exists when a company is removed from the Companies Register (other than on amalgamation), the current account balance will be taxable income of the shareholder 6 months after the company was removed.
This applies not only to shareholder current accounts, but also to current accounts of a company director or a close relative of the shareholder or director.
These changes send a clear message from Inland Revenue that shareholders should not expect to be able to extract value from their companies indefinitely without tax consequences.
To avoid the shareholder current account tax trap, overdrawn shareholder current accounts should be repaid before the company is liquidated or removed from the Companies Office register.
Navigating tax rules when closing a company can be complex, particularly when overdrawn shareholder current accounts are involved. Our experienced tax team can help you understand how the latest rules may affect you and your business, and ensure your shareholder current account is dealt with correctly. Talk to our team today for tailored advice on closing your company and managing your tax obligations.
Siew Mei Ou Yang is a tax specialist at Nexia Auckland with extensive experience advising businesses on income tax and GST matters. She specialises in tax disputes and audits, property transactions, cross-border tax structuring, business acquisitions and disposals, and tax rulings.
Shelley-ann Brinkley is a tax specialist and Director at Nexia Auckland, with more than 25 years’ experience providing tax consulting services. Her expertise includes property transactions, international tax and structuring, business acquisitions and disposals, GST and indirect taxes, tax compliance, Inland Revenue audits, and interpreting new tax legislation.
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Nexia New Zealand is one of New Zealand’s leading full-service chartered accounting and business advisory consultancy firms, offering the full range of chartered accounting, business advisory, corporate advisory, tax, audit services.
Nexia New Zealand has four offices throughout New Zealand: Victoria Street in Christchurch, Albany on Auckland’s North Shore, Newmarket in the Auckland CBD and Hastings in Hawke’s Bay.
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