Director’s Loans In New Zealand: What You Need To Know

If you run a company in New Zealand, there’s a good chance you’ll come across director’s loans at some point - especially in the early days when cashflow is tight, or when you’re juggling irregular income.

Maybe you’ve paid a supplier invoice on your personal credit card. Maybe you’ve taken money out of the company to cover a short-term personal expense. Or maybe you’ve injected your own funds into the business to keep things moving.

All of those situations can end up recorded as a director’s loan. And while director’s loans can be a totally legitimate (and practical) tool, they can also create legal, tax, and relationship headaches if you don’t set them up properly from day one.

This guide breaks down how director’s loans work in NZ, what the key risks are, and what you can do to keep things clear, compliant, and easy to manage.

What Is A Director’s Loan?

A director’s loan is money owed between a company and a director (or sometimes a shareholder/director), recorded in the company’s books as a loan account.

In practice, it’s usually one of these:

• The director owes the company money (for example, the director has taken drawings or personal expenses were paid by the company).
• The company owes the director money (for example, the director paid business expenses personally, or lent money to the company to help with working capital).

It’s common to track this in an accounting system as a “director’s current account” or “director loan account”. The key idea is simple: it’s not “free money” - it’s a balance that needs to be accounted for and managed.

Common Examples Of Director’s Loans In Small Businesses

Director’s loans often pop up without you deliberately “taking out a loan”. For example:

• You pay a business bill personally (fuel, stock, software, rent) and expect the company to reimburse you later.
• The company pays for something that’s partly personal (for example, a mobile plan or vehicle costs) and the personal portion is allocated to you as a loan.
• You withdraw money from the business in between payroll cycles, planning to “square it up later”.
• You put personal savings into the business bank account to cover GST, wages, or a big supplier invoice.

None of these are automatically “wrong” - but they do need to be recorded correctly and handled with care.

Why Director’s Loans Matter (And Why They Can Get Tricky)

Director’s loans matter because they sit right at the intersection of:

• tax (how Inland Revenue may view payments, benefits, interest, and shareholder-employee arrangements),
• company law (directors’ duties and what transactions a company is allowed to enter into), and
• practical governance (keeping things fair and transparent between shareholders, co-founders, and the business).

When things are friendly and the business is small, it’s easy to treat the company bank account like an extension of your personal finances. But that can create problems later - especially if:

• you bring on a co-founder or investor,
• you apply for finance,
• you sell the business,
• someone leaves the company, or
• the company hits cashflow trouble and solvency becomes an issue.

In other words, a director’s loan is often “fine”… until it’s not. The goal is to keep it clean and documented so you can make decisions confidently as your business grows.

How Should You Structure A Director’s Loan Properly?

If you want to use director’s loans safely, the best approach is to treat them like any other financial arrangement: clear terms, clear records, and a paper trail that matches what’s actually happening.

1. Be Clear On The Direction Of The Loan

Start with the basics: who owes who?

• Company owes director: this is often the director funding the business or covering expenses personally.
• Director owes company: this is often personal drawings, personal use of company funds, or company-paid private expenses.

Why does this matter? Because the tax treatment and risk profile can be very different depending on the direction of the loan.

2. Put The Arrangement In Writing (Especially If It’s More Than Incidental)

For small, one-off reimbursements, you might not need a long formal document - but once the balance becomes significant, ongoing, or interest-bearing, it’s worth documenting properly.

A tailored Loan Agreement can cover things like:

• the loan amount (or how it will be calculated),
• whether interest applies (and at what rate),
• repayment dates or a repayment schedule,
• whether the loan is repayable on demand,
• what happens if repayment doesn’t occur (default), and
• any security being provided (if relevant).

It’s also a helpful way to show the loan is genuine - not a disguised dividend, salary payment, or informal cash extraction.

3. Check Whether You Need Company Approvals

Companies aren’t just “you with a bank account” - they are a separate legal person. That means the company should make decisions properly, especially when the transaction involves a director (because of conflicts of interest).

Depending on your structure and who else is involved, you may need:

• a board resolution,
• shareholder approval, and/or
• to record disclosure of the director’s interest.

In NZ, transactions involving directors can also trigger specific Companies Act requirements (including around disclosure of interests and, in some cases, whether shareholder approval is required). Having a clear Directors Resolution (and keeping it with your company records) can save you a lot of stress later when someone asks, “Was this properly approved?”

4. Make Sure Your Governance Documents Match The Reality

If there are multiple owners or directors, this is where misunderstandings happen fast. For example:

• Can any director draw funds from the company?
• Do director loans require consent from the other director/shareholder?
• What happens to a director’s loan account if someone exits?

This is why it’s worth having (and actually using) governance documents that deal with money movements between owners and the company, including a Shareholders Agreement and a Company Constitution.

If you’re still early-stage, it’s also smart to align expectations with a Founders Agreement - because money issues are one of the fastest ways for co-founders to fall out.

5. Keep Clean Accounting Records (And Reconcile Regularly)

This part sounds boring, but it’s where most director’s loan problems start.

A good habit is to reconcile your director’s loan account regularly (monthly or quarterly), so you can answer questions like:

• Is the balance growing over time?
• Is it realistic to repay it?
• Are personal and business expenses being allocated correctly?
• Is there supporting documentation for each entry (invoices, receipts, notes)?

Clean books make it easier for your accountant to give you accurate tax advice, and it makes the company far more “due diligence ready” if you ever sell or raise capital.

What NZ Laws And Tax Rules Apply To Director’s Loans?

Director’s loans touch a few different legal and compliance areas. The “right” answer depends on your company, who owns it, and how the loan is being used - so it’s always worth getting advice tailored to your situation.

Note: The information below is general only and isn’t tax advice. Director and shareholder loan tax outcomes can be very fact-specific, so it’s important to speak with your accountant (or a tax adviser) about how the rules apply to your situation.

That said, here are the big concepts to be aware of.

Directors’ Duties And Conflicts Of Interest

Directors have duties when making decisions for the company. In plain terms, you’re expected to act in the best interests of the company and manage conflicts properly.

A director’s loan is a classic conflict-of-interest scenario, because the director is on one side of the transaction and the company is on the other.

Practically, that’s why documenting approvals and decision-making matters. Under the Companies Act, directors generally need to disclose their interest in transactions and ensure the company’s decision-making is properly recorded. If the company later becomes insolvent or disputes arise between shareholders, informal loans can be scrutinised closely.

Solvency And Cashflow Considerations

Even if a director’s loan is recorded properly, you still need to think about whether the company can afford it.

For example, if a director is drawing significant funds from the company (meaning the director owes the company), this can weaken cashflow and potentially raise solvency concerns. In NZ, certain transactions and distributions are restricted if a company can’t meet the solvency test - and directors are expected to take solvency seriously.

If your company is under financial pressure, it’s a good idea to pause and get advice before continuing to draw funds or restructure balances.

Inland Revenue Treatment (Including Interest And Benefits)

Tax is often the biggest practical issue with director’s loans. Inland Revenue may look at transactions and ask: is this really a loan, or is it income (like salary), a dividend, or a taxable benefit?

Depending on your circumstances, issues can include:

• Interest: whether interest should be charged on the loan (and at what rate), and what that means for deductions and taxable income.
• Shareholder-employee arrangements: many owner-managed businesses have directors who are also shareholders and employees, which can bring additional tax considerations around how payments are characterised and reported.
• Fringe Benefit Tax (FBT): in some cases, discounted or interest-free loans provided to employees (including some shareholder-employees) can be treated as a fringe benefit, but whether FBT applies depends on the specific facts and any relevant exemptions or thresholds.
• Loan forgiveness: if the company forgives the loan (or never intends to collect it), that may have tax consequences - for example, it could be treated as a distribution or income depending on the structure and circumstances.

The tax outcomes here can be very fact-specific, so it’s smart to loop in your accountant early. From the legal side, having proper documentation helps support the intended treatment.

Related Party Transactions And Finance Documents

If the company is borrowing money from a director (meaning the company owes the director), you might also consider whether security is appropriate - especially if the amounts are significant.

For example, if a director lends money to the company and wants protection if the business fails, you may consider registering security over company assets using a General Security Agreement (and then registering the security interest on the PPSR).

This isn’t always necessary for small loans, but it becomes more relevant where:

• the loan is large,
• there are multiple shareholders and not everyone is funding equally,
• the director wants priority/clarity if the company is wound up, or
• external financiers are involved and you need to understand who ranks where.

Common Director’s Loan Mistakes (And How To Avoid Them)

Most director’s loan issues aren’t caused by bad intentions - they happen because business owners are busy, and it feels easier to “sort it out later”.

Here are some common traps we see, and what you can do instead.

Mistake 1: Treating Drawings As “Temporary” For Too Long

If the director owes the company money and the balance keeps increasing, you may end up with:

• a repayment problem (especially at year-end),
• tax complications, and
• disputes about whether the withdrawals were actually agreed.

Better approach: agree on a repayment plan early, document it, and keep the balance under control.

Mistake 2: No Clear Separation Between Personal And Business Spending

When a company pays mixed personal/business expenses, it becomes hard to allocate correctly. That can create messy accounts and compliance risk.

Better approach: set up clear internal rules (even a simple policy) about what can be paid by the company and what needs director approval or reimbursement.

Mistake 3: Not Getting Approval When There Are Multiple Owners

If you have co-directors or multiple shareholders, undocumented director’s loans can quickly feel unfair - even if you’re confident it all “evens out”.

Better approach: document approvals, keep transparency, and make sure your governance documents cover loans and drawings.

Mistake 4: Using Generic Templates That Don’t Match Your Business

Director’s loans often sit alongside other important arrangements (like how directors are paid, dividend decisions, or what happens if someone leaves). A generic document might miss the clauses that matter for your situation.

Better approach: get the key documents tailored, and make sure they align with your structure and goals.

Mistake 5: Forgetting About Exit Scenarios

Here’s the scenario many founders don’t plan for: your business is going well, then a co-founder wants out. Suddenly everyone is focused on the numbers, and the director’s loan account becomes a major negotiation point.

Questions that often come up are:

• Does the departing founder have to repay what they owe the company before transferring shares?
• Does the company need to repay what it owes them before completion?
• Is the loan offset against the share price?

Better approach: plan for this upfront in your shareholder arrangements, and keep accurate records so the balance is never a surprise.

Key Takeaways

• Director’s loans are common in NZ owner-managed companies, and they usually arise when either the director funds the business or takes money out of the business.
• Even if a director’s loan feels informal, it can create real legal and tax consequences if it isn’t documented, approved properly, and recorded accurately.
• For anything ongoing or significant, it’s worth having a written loan arrangement (including repayment terms and interest) and recording approvals with a directors’ resolution.
• If there are multiple owners, strong governance documents (like a shareholders agreement and constitution) help prevent misunderstandings and disputes about drawings, reimbursements, and repayments.
• Tax treatment can be complex (including interest, shareholder-employee considerations, and possible FBT issues), so you should involve your accountant early and keep clean records.
• If a director is lending substantial funds to the company, security documents (like a GSA) may be worth considering to clarify risk and repayment priority.
• Getting your “paperwork and process” right from day one makes your business easier to run, easier to grow, and far easier to sell or restructure later.

If you’d like help documenting or reviewing your director’s loan arrangements, setting up the right governance documents, or doing a wider legal tidy-up as your business grows, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.