New Zealand companies pay corporate income tax at a rate of 28%. The tax position for shareholders depends on how profits are extracted: the method chosen, whether salary, dividends or drawings, affects the total tax paid, the timing of that liability and the compliance obligations that follow.
This guide explains the main profit repatriation methods available to New Zealand resident business owners, how the imputation system works to reduce double taxation and what Inland Revenue’s (IRD) proposed changes to the taxation of shareholder loans could mean for current planning approaches.
A company is a separate legal entity and profits are not automatically taxed in the hands of shareholders. Shareholder tax only arises when funds are extracted, and the method used determines the different tax outcomes.
There are four main ways businesses extract profits. Each has a different tax treatment, deductibility position and compliance requirement:
| Method |
Deductible to the company |
Subject to PAYE |
Personal tax rate applied at the shareholder level |
Key considerations |
| Shareholder salary |
Yes |
Yes |
Marginal rate |
Should reflect genuine services; reduces company’s taxable income |
| Dividend |
No |
No – RWT will likely apply (at 33% less any imputation credits attached) |
Marginal rate (offset by imputation credits) |
Imputation credits reduce or eliminate double taxation |
| Drawings |
N/A
Interest likely applies to the balance – this will be taxable to the company |
No – RWT may apply to interest required to be attached to overdrawn balances |
No immediate tax, but consequences if account is overdrawn
To consider: the impact of interest or FBT or a deemed dividend approach for interest not applied |
Effectively an advance against future salary or dividend |
| Director’s fee |
Yes |
Yes |
Marginal rate |
Should reflect genuine governance services |
Most businesses use a combination of salary and dividends, with drawings throughout the year that are cleared by a year-end salary or dividend declaration.
Shareholder salary
A shareholder salary is deductible to the company, reducing its taxable income. The salary is then taxed at the shareholder’s marginal rate through pay-as-you-earn (PAYE).
Key points to consider include the following.
- The salary needs to be commercially reasonable for the services provided.
- A salary can be declared after year-end and still be deductible for that year.
- PAYE may apply only when payment is made.
- Any salary declaration must be properly documented.
Dividends
Dividends are paid from after-tax profits and usually carry imputation credits. These credits reflect tax already paid by the company and reduce or eliminate double taxation for shareholders. Resident withholding tax (RWT) will apply to the dividend payment in most circumstances.
Drawings
Drawings are cash withdrawals debited to the shareholder current account. Drawings are treated as advances against future salaries or dividends. Tax consequences arise if the current account is overdrawn at year-end.
Director’s fees
A director’s fee is deductible to the company and taxed at the recipient’s marginal rate via PAYE. The fee should reflect the genuine value of the governance and oversight services provided, separate from any operational salary.
How imputation credits and the ICA work
New Zealand’s imputation system prevents double taxation through the Imputation Credit Account (ICA), which tracks the tax paid by the company. The ICA records the tax a company has paid and determines how much credit it can attach to dividends. Tax payments create credits, while attaching imputation credits to dividends creates debits. The ICA must not be in deficit at 31 March, or an imputation penalty tax applies.
Companies can only attach credits that reflect tax already paid. If no credits are available (e.g. due to tax losses), dividends are unimputed and subject to full resident withholding tax (RWT). Ownership continuity is also critical. A change of 34% or more in shareholding can result in the forfeiture of existing ICA credit balances.
Salary vs dividends on tax efficiency
The optimal split depends on the personal tax rate and the company’s imputation credit position:
| Scenario |
Better option |
Why |
| Personal rate below 33%, company has full ICA credits |
Dividend |
Credits may fully offset tax, potentially creating refunds |
| Personal rate is 33%, company has full ICA credits |
Either |
Outcomes are equivalent on a fully imputed dividend |
| Personal rate is 39%, company has full ICA credits |
Depends on cashflow needs |
Salary reduces company tax; dividend does not |
| Company has no imputation credits (e.g. tax losses) |
Salary |
The salary is deductible to the company; both salary and dividends are taxable at the shareholder’s marginal rate; withholding (dividends) or PAYE implications arise; dividends require the company directors to certify company solvency after payment; this may not be possible where significant tax losses are incurred |
Salary is subject to ACC earner levies and KiwiSaver contributions, while dividends are not.
Regular modelling is important, as the optimal mix changes with income and business performance.
Shareholder loans and overdrawn current accounts
An overdrawn shareholder current account can be treated as a loan from the company to the shareholder. Interest should be applied (RWT may apply), or a deemed taxable benefit or dividend arises.
Under IRD’s Interpretation Statement IS 24/09:
- Interest shortfalls (below the prescribed rate) are treated as taxable dividends, calculated quarterly on the daily overdrawn balance
- Alternatively, the benefit can be treated as a fringe benefit, usually less tax-efficient
- The amount on loan forgiveness is generally treated as a dividend or income
Overdrawn accounts also raise solvency issues under the Companies Act. These accounts should be reviewed before 31 March and cleared through salary or dividend declarations where needed.
Proposed changes by Inland Revenue
IRD has proposed reforms to limit the use of shareholder loans to defer personal tax, driven by the gap between the 28% corporate tax rate and the 39% top personal rate. Under the proposal, new loans made on or after 4 December 2025 would be treated as taxable dividends where the total overdrawn balance exceeds NZD 50,000 and is not repaid within 12 months after the end of the income year in which it was made. Imputation credits would likely still be available to reduce the resulting tax liability.
Additional proposals include taxing outstanding shareholder loans when a company is deregistered and introducing enhanced reporting requirements for capital accounts such as available subscribed capital (ASC) and available capital distribution amount (ACDA).
What this means in practice
Although the proposals are not yet law and may change, they signal increased scrutiny of loan-based profit extraction. Balances existing on 5 December 2025 are generally unaffected (although we would anticipate a FIFO treatment for repayments); new drawings after this date will fall within scope. Businesses should therefore monitor new advances closely, ensure timely repayment and consider using salary or dividends instead of allowing balances to accumulate.
Retaining profits in the company
Retaining profits defers to personal tax, as only the 28% corporate tax is paid initially. This may be beneficial where profits are reinvested, but key considerations include:
- Personal services attribution rules: These rules treat the individual service provider (typically the founding shareholder and sole director) as earning the personal services income derived by the company as taxable to that shareholder in specific circumstances.
- Tax deferral vs tax cost: lower-rate taxpayers may benefit from earlier distribution of fully imputed dividends.
- Imputation credit efficiency: imputation credits do not expire but can be lost through ownership changes.
- Exit planning: large, retained earnings inside a company can complicate company sales
- IRD’s reform direction: IRD is increasingly focused on strategies relying on long-term retention combined with loan-funded withdrawals.
Conclusion
Profit repatriation in New Zealand requires a balanced approach across salary, dividends and shareholder accounts to achieve tax efficiency while maintaining compliance. While the imputation system largely eliminates double taxation, it introduces complexity through imputation credit account management and shareholder continuity rules.
With IRD increasingly focusing on shareholder loans and the gap between corporate and personal tax rates, as well as the existing complications arising from the charging of interest on overdrawn accounts (that may be taxable to the company and non-deductible to the shareholder), businesses should regularly review how profits are extracted. A well-planned approach is essential to minimise tax leakage, manage risk and support long-term business objectives. Our guide on corporate tax planning strategies provides further insights into managing tax outcomes effectively.
How Acclime can help with profit repatriation in New Zealand
Acclime New Zealand supports businesses with structuring and managing profit repatriation. We assist with PAYE, dividend reporting and maintaining imputation credit accounts, while helping you manage shareholder current accounts.
Our team also supports year-end processes and ensures your financial records are accurate and compliant. Contact us to discuss how we can assist with your profit repatriation strategy.
OECD Pillar Two in New Zealand
