Director Loans to Your NZ Company: Interest, FBT, and How to Do It Right
Lending money to your own company is common at startup. But the IRD has specific rules about interest, fringe benefit tax, and documentation. Here is what you need to know.
Why Directors Lend Money to Their Own Companies
When a new NZ company needs startup capital -- for equipment, stock, a lease deposit, or working capital -- the director is often the cheapest and fastest source of funding. You lend the company money from your personal savings, the company uses it, and eventually pays you back when it has cash flow.
This is perfectly legal and very common. But there are tax rules that apply, and getting them wrong can result in unexpected IRD assessments.
Director Loans From You to the Company
When you lend money TO the company (the company owes you), this is a liability on the company's balance sheet. The company may or may not pay you interest on this loan.
If you charge no interest: You are not required to charge interest. You do not need to declare income you did not receive. The loan is simply debt the company owes you.
If you charge interest: The interest becomes income to you (taxed as personal income) and is deductible to the company (reducing its taxable profit). You and the company must have a written loan agreement, and the interest must be at a reasonable commercial rate to be deductible.
Director Loans From the Company to You
This is where the tax rules become more complex. If the company lends money TO you (the director), IRD may treat it as a fringe benefit or -- if not documented properly -- as income to you.
Interest-free or low-interest loans from the company to you: These are subject to Fringe Benefit Tax (FBT). The company pays FBT at 63.93% on the value of the benefit (the difference between the interest you are actually charged and the FBT prescribed rate, currently around 7-8% per annum). This is a significant cost if the loan balance is large.
How to minimise FBT exposure: Charge yourself the prescribed interest rate, keep the loan balance as low as possible, or consider taking a salary instead if cash flow allows.
Shareholder Current Account vs Director Loan
In practice, many small NZ companies use a "shareholder current account" or "director current account" that moves in both directions throughout the year. You might deposit money some months, withdraw drawings others.
IRD expects this account to be documented and for any net debit balance (the company owes you money) to be properly accounted for. If the balance consistently shows the company owing you money, that is fine. If the balance consistently shows you owing the company money, FBT may apply.
Documentation
For any director loan exceeding $10,000, prepare a written loan agreement that specifies:
- The principal amount
- The interest rate (or that the loan is interest-free)
- Repayment terms (or that repayment is on demand)
- The date the loan was made
Keep this in your company records (or registered office). Your accountant can prepare a standard loan agreement.
Getting Help
Director loan accounts are one of the most common areas where new company directors get into trouble with IRD. An accountant who specialises in NZ company tax can review your current account structure and advise on the most tax-efficient approach.
To find a qualified NZ accountant, visit our Connect with a Professional page.