Repaying a Shareholders Loan

The IRD were asked whether a couple of scenarios were tax avoidance. In November 2014, they answered those questions. Here is an explanation of scenario 1 which is relevant for property investors.

The scenario is where a trust loans $1m to a company that it owns (called a shareholders loan). Later on, the company borrows $1m from the bank and repays the money to the trust. The trust then used the $1m to buy a holiday home for personal use.

The question is whether repaying that shareholders loan so that the company can get an interest deduction is tax avoidance, as the funds have ultimately been used to purchase a private holiday home.

The IRD confirmed this was not tax avoidance as it is the intention of the legislation to allow a company to borrow money to purchase assets that generate income.

This backs up an earlier answer from the IRD that said that a look-through company can borrow to purchase a shareholders old home if it is to become a rental property.

I have always believed that repaying a shareholders loan was not tax avoidance and have always promoted this idea as a good option to improve your tax situation but it's good to have further confirmation of this.

Have a look at the statement of financial position in your financial statements and see if there is a liability called "Shareholders Loan" of say $100,000 or more.

If there is, and you still have loans on your personal home, then you can ask your bank to increase the loan under your company by the amount of the shareholders loan and decrease your personal home loan by the same amount.

The benefit of doing this is that you can then claim the interest on that additional loan under the company as a tax deductible expense and improve your tax position. 

Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.