An overdrawn shareholder current account — the line a lender reads first

A shareholder current account — also called a shareholder loan account — records the net balance of funds a shareholder has loaned to, or drawn from, their company. It becomes overdrawn the moment a shareholder draws or borrows more from the company than they've put into it, and from that point the company is, in effect, lending the shareholder that balance. Left sitting there on interest-free or below-market terms, it can trigger a deemed dividend or fringe benefit. And well before Inland Revenue gets to it at year end, a credit assessor reading the accounts sees exactly the same number and draws a conclusion of their own: this is cash that has already left the business.

Key Takeaways

What makes a current account "overdrawn"

Inland Revenue's own description is direct: "when a shareholder draws or borrows more money from the company than they have loaned to it, their shareholder current account becomes overdrawn" — and "being overdrawn indicates the company is lending the amount of the overdrawn balance to the shareholder." One point worth knowing early: a company cannot claim an income tax deduction for shareholder drawings, because drawings are not a company expense in the first place.

This all sits inside a specific legal category: a close company — one with five or fewer natural persons or trustees who hold more than 50% of the voting or market value interests, with associated persons treated as one for that count. A great many New Zealand companies fall within that definition without necessarily thinking of themselves as one.

Inland Revenue's interpretation statement on the topic, IS 24/09, works through a worked example that shows exactly how a balance flips: Nicola advances $10,000 to her company, Jungle Vibes Limited, on 1 April 2023. She then draws $5,000 a quarter for personal living costs across the year. By 31 March 2024, her loan account has moved from a $10,000 credit balance to being overdrawn by $5,000 — the advance has been fully drawn back out, and then some. It's a simple, common pattern: a director puts money in early, then draws it back out over the year without tracking exactly when the balance crosses from credit into overdrawn.

The reason this matters at all is structural: a close company is a separate legal entity from its shareholders. Company funds are the company's own property, and a shareholder's access to that property carries real tax consequences under the dividend, financial arrangements, fringe benefit tax, resident withholding tax and investment income reporting rules — not simply an informal ledger entry between a director and their own business.

Why leaving it on interest-free terms triggers a dividend

Under the Income Tax Act, a dividend is a transfer of company value from a company to a person, where the cause of the transfer is a shareholding in the company and no exclusion applies. A transfer of company value arises where a company provides money or money's worth exceeding the market value of what's provided back in return.

For a loan like an overdrawn shareholder account, the Commissioner's own view of what constitutes adequate "market value" from the shareholder is direct: generally, interest payments on top of the principal repayments — because a rational lender expects compensation for the time value of money and the risk of lending, and that's normally achieved through a market interest rate. So if a company charges interest below the relevant market rate, or charges no interest at all, the shareholder hasn't provided that market value, and "this situation results in a 'transfer of company value' to the shareholder." In Nicola's case, Jungle Vibes Limited providing her overdrawn balance interest-free is exactly that: the amount advanced is worth more than the value of her future repayments, precisely because there's no interest compensating for the time value of that money.

One genuinely useful thing to understand about why this whole mechanism exists the way it does: working out an actual market interest rate for a loan like this is genuinely difficult, because "there is unlikely to be a 'market' for overdrawn shareholder loan accounts" in any real sense — there's no comparable open-market product to benchmark against. That's exactly why the prescribed calculation method exists: a practical, workable proxy in place of trying to construct a market rate from nothing.

Dividend or fringe benefit — never both

Where the benefit runs to a shareholder-employee rather than a plain shareholder, the fringe benefit tax rules apply instead of the dividend rules — and it's a strict either/or: "either the dividend or the FBT rules apply to that benefit... the distinction turns on whether the person receiving the loan is a shareholder or a shareholder-employee." For this specific purpose, IS 24/09 defines a shareholder-employee simply as someone who holds shares in a close company of which they're also an employee — worth noting this doesn't necessarily line up exactly with the statutory definition used elsewhere in the Act.

Both routes allow a genuinely useful backdating mechanic. Certain amounts a company pays a shareholder — a fully imputed dividend, for instance — can be used to repay an overdrawn loan account and treated as having been repaid on the later of the start of the year the company pays them, or when the loan account first became overdrawn. Under the FBT route specifically, there's an extra layer of flexibility not available under the dividend rules: an amount derived in a later year can be credited even further back to an earlier year, provided the shareholder-employee also elects to treat that amount as taxable in that earlier income year.

How the deemed amount is actually worked out

The dividend or fringe benefit amount is calculated using a formula built around the loan balance, the prescribed rate, the number of overdrawn days, and any actual interest that's accrued. The relevant period for counting overdrawn days differs slightly by route: for dividends, it's each quarter in which the account is overdrawn; for fringe benefits, it's also a quarter, unless the company has specifically elected the income-year option available to close companies.

The loan balance itself is worked out on a daily basis, and has to account for any payments that get retrospectively credited back to the account under the backdating rules above. One edge case worth flagging if a loan account isn't in New Zealand dollars: the formula applies only to NZD-denominated accounts — a loan expressed in a single foreign currency instead uses whatever benchmark rate the Commissioner has separately set for that currency, if one exists.

The fix: charge interest at the prescribed rate

The company and shareholder can simply agree that interest applies to the overdrawn balance, at either the market rate or Inland Revenue's own prescribed rate. Do that, and the outcome is clean: "the dividend or fringe benefit is reduced by any interest accrued on the overdrawn shareholder loan account for the relevant period" — and specifically, "if the shareholder is charged interest on the overdrawn loan account at the prescribed rate, no dividend or fringe benefit arises" at all. The current prescribed rate is published on Inland Revenue's own "Prescribed interest rates for fringe benefit tax (FBT)" page — check the figure that applies for the period in question directly, since it's a rate that moves.

Worth being honest about here: this fix removes the dividend or FBT exposure specifically, but it isn't entirely free of other consequences, and Inland Revenue itself flags that agreeing to charge interest "may lead to other tax consequences that companies and shareholders should be aware of" rather than presenting it as a complete solution on its own:

• The interest charged is taxable income to the company, and is usually non-deductible to the shareholder.
• Even where no dividend or fringe benefit arises because the prescribed rate is being charged, the shareholder may still need to deduct Resident Withholding Tax (RWT) on that interest, or provide investment income information to Inland Revenue.
• Interest paid by a shareholder is generally not deductible to them, because drawings are usually applied to private or domestic expenditure with no connection to earning income. Where a shareholder has genuinely drawn money for an income-earning activity or business, though, a deduction may be claimed to the extent the interest relates to that activity — subject to the usual limitations, and only with proper documentation to support it.
• In most cases a shareholder paying this interest doesn't need to withhold RWT at all. A withholding obligation can arise specifically where the shareholder has RWT-exempt status, or pays the interest while carrying on a taxable activity — and even then, it's subject to a $5,000 de minimis threshold. No withholding is needed at all on interest paid to a company that itself holds RWT-exempt status.

Why a lender reads a large overdrawn balance as a live risk

None of the mechanics above explain what a bank credit assessor actually does with this number once it lands on a set of accounts — that's a separate read entirely, and it's worth understanding on its own terms.

A trade debtor on a balance sheet is expected to convert back to cash through the ordinary course of trading — a customer pays their invoice, the debtor becomes cash, the cycle continues without depending on any one individual's personal finances. An overdrawn shareholder current account doesn't behave that way at all. Its recovery depends entirely on the director's own capacity and willingness to repay — not on the business trading well, not on a customer settling an account, but on one person's personal financial position. A credit assessor reading serviceability for a new loan treats that very differently from genuine trading assets, because it isn't one.

There's a second read sitting behind the first. A large, growing overdrawn balance signals a business that's extracting cash from itself faster than it may be able to sustain — and a credit assessor weighing whether the business can service a new facility on top of that will reasonably ask whether a director who's already drawn out more than they've put in has the room to absorb a further structured repayment. And there's a governance signal in it too: an informal, undocumented, growing balance between a company and the person who controls it reads as exactly the kind of loose financial discipline a credit assessor probes further on, because it blurs the line between the business's own financial position and the director's personal one. Getting it formally documented and interest-bearing — or repaid outright — before you apply changes what a credit assessor is actually looking at.

What if you just write the balance off instead?

Writing it off isn't a clean escape route either. Where a shareholder is relieved of their obligation to repay an overdrawn balance, income arises under the dividend rules or the financial arrangements rules, to the extent of the amount forgiven — generally treated as dividend income for the shareholder. Both the company and the shareholder also have to calculate a base price adjustment (BPA), specifically so the shareholder isn't taxed twice across both the dividend and financial arrangements regimes, and so the company's write-off doesn't produce a deductible negative BPA amount it was never entitled to.

Scope worth knowing

This whole framework, under IS 24/09, applies specifically to overdrawn loan accounts owed to close companies resident in New Zealand, owed by shareholders who are natural persons resident in New Zealand — and Inland Revenue is explicit that the guidance may not apply where the arrangement is part of a tax avoidance arrangement. The interest income the company itself derives on the loan is generally timed and quantified under the financial arrangements rules, subject to concessionary treatment for smaller-scale taxpayers, and where RWT has actually been withheld from interest payable to the company, the company can claim a credit for it in the year the interest is derived — provided the RWT was genuinely withheld and paid across to Inland Revenue.

Frequently Asked Questions

Does charging interest at the prescribed rate fix everything? It removes the dividend or fringe benefit exposure specifically, which is the main risk. It doesn't remove every other consideration — RWT and investment income reporting obligations can still apply depending on the shareholder's status, and the interest itself is usually non-deductible to the shareholder unless it relates to a genuine income-earning activity.

What's the current prescribed interest rate? It's published directly on Inland Revenue's "Prescribed interest rates for fringe benefit tax (FBT)" page and changes from period to period — check the figure for the specific period before agreeing terms rather than assuming a rate you've seen quoted elsewhere still applies.

Can we just write the overdrawn balance off instead of dealing with interest? Not without consequences of its own. Relieving a shareholder of the obligation to repay generally creates dividend or financial-arrangements income to the extent forgiven, and both the company and shareholder need to work through a base price adjustment to avoid being taxed twice on the same amount.

Does this apply to every New Zealand company? Only close companies — five or fewer natural persons or trustees holding more than 50% of the voting or market value interests — where the shareholder is a natural person resident in New Zealand. It also doesn't apply where the arrangement is genuinely part of a tax avoidance structure.

Why would a lender care about a shareholder account balance if the tax side is sorted? Because the tax fix and the credit read are two separate questions. Even with interest correctly charged, a large overdrawn balance still tells a credit assessor that cash has been drawn out of the business by the director personally, rather than sitting in it as working capital or genuine trading assets — and that shapes how they assess the business's capacity to service new debt.

Deplexifi works from the credit team's side of the desk across New Zealand, Australia and the UK, and can tell you exactly how a shareholder current account balance will read on your next finance application before you apply anywhere.

Assuming an overdrawn shareholder current account is purely a bookkeeping entry the accountant can tidy up later. It's a live tax exposure the moment it's overdrawn on non-market terms, and a live credit-risk signal the moment a lender sees it.

Nothing here is regulated financial advice. Deplexifi arranges commercial finance for businesses — this article describes general lending practice and the published position of the sources listed below, not a recommendation for any individual business.