Understanding the Shareholder's Current Account

The shareholder’s current account records the flow of funds between a company and its shareholders. In New Zealand, these accounts are common in closely held companies and play a crucial role in governance, tax compliance, and financial stability. Mismanaging them can lead to tax complications, cash flow strain, or even solvency issues.  

This guide explains how shareholder current accounts work, how drawings and contributions are recorded, what happens if accounts become overdrawn, and how to avoid problems with the IRD.

What is a Shareholder’s Current Account?  

A shareholder’s current account functions like a running ledger between the company and each shareholder. It sits on the company’s balance sheet and tracks all money that flows in and out:  

• Credits (company owes shareholder): for example, when a shareholder lends the company money or pays company expenses personally.  
• Debits (shareholder owes company): for example, when a shareholder withdraws money from the company.  

If the company owes you money but cannot repay, your personal financial position could be affected. If you owe the company money, you may face tax consequences.

Contributions and Working Capital  

At start-up stage, shareholders often inject capital to get the business moving or up and running. These amounts are credited to the shareholder’s current account.  

During trading, shareholders may cover company costs personally. These are also advances to the company and should be credited to the current account. For clean record-keeping, the shareholder should transfer money to the company’s bank account, and then pay the bills from the companies account.  

This transparency helps with accurate accounting, tax returns, and cash flow forecasting.  

Drawing Money from the Business  

When shareholders withdraw funds, these are called “drawings.” Each drawing is debited to the shareholder’s current account, reducing any money owed to them.  

Key points:  

• Drawings are not deductible business expenses.  
• Consistently withdrawing more than you have contributed will create an overdrawn balance.  
• Overdrawn balances may concern banks or lenders.  

Many SMEs reduce risk of drawings (and an overdrawn current account) by paying a regular shareholder salary (via PAYE) or planning dividends where profits allow, instead of relying on ad-hoc drawings.  

Overdrawn Shareholder Accounts and IRD Rules  

If your shareholder current account is overdrawn at year-end, the IRD treats it as a loan from the company to the shareholder.  

• The IRD requires interest to be charged at the prescribed rate.  
• If interest is not charged, the benefit is subject to Fringe Benefit Tax (FBT).  
• Overdrawn accounts can also raise solvency issues under the Companies Act.  

Options to resolve an overdrawn balance include: 

1. Repayment: Transfer money back into the company to cover the overdrawn balance.  
2. Declare a shareholder salary: If profitable, declare a salary to the shareholder to offset the debit.  
3. Declare a dividend: Where retained earnings exist and solvency tests are passed, declare a dividend and credit it against the account.  

Why Managing Shareholder Current Accounts Matters  

Keeping shareholder accounts balanced helps:  

• Avoid unexpected IRD tax charges.  
• Maintain solvency compliance when paying dividends.  
• Provide clearer information for banks or potential buyers.  
• Support smoother cash flow management.  

Best practice is to review shareholder accounts at least annually, alongside tax and dividend planning.  

FAQs:  

Are drawings the same as salary in NZ?  
No. Drawings are not salary or wages and are not deductible.  

What happens if I don’t charge interest on an overdrawn account?  
The IRD deems a benefit has been provided and may apply FBT.  

Should I pay myself by drawings, salary, or dividends?  
It depends on your business performance, solvency and tax planning. Many SMEs use a combination.  

How do I know the prescribed IRD interest rate?  
The IRD sets and publishes the rate annually.   You can find this on the IRD website. 

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A shareholder’s current account is more than a ledger — it’s a financial tool that affects tax, solvency, and long-term business health. Proactive management ensures compliance and protects both your company and your personal position.  

If you’d like advice on reviewing or restructuring your shareholder’s current account, contact Andersen today.

Author – Graeme Wilson