Director Drawings In New Zealand: How To Pay Yourself Legally

When you’re running a small business, it’s normal to reach that point where you think: “I’m working hard - how do I actually pay myself?”

If your business is a company, you might hear terms like director drawings, “shareholder salary”, “dividends”, or “director’s loan”. They can sound interchangeable, but they’re not - and getting it wrong can create tax headaches, cashflow issues, and (in the worst cases) compliance problems under company law.

We’ll walk you through how director drawings work in New Zealand, when they’re appropriate, and the practical ways to pay yourself legally as a director (especially if you’re also a shareholder). This article is general information only and isn’t tax advice - for guidance on your specific situation (including PAYE, GST, withholding tax, imputation credits and shareholder loan accounts), it’s best to speak with your accountant or Inland Revenue.

What Are Director Drawings?

In everyday small business language, “director drawings” usually means money you take out of the business for personal use.

But the legal and tax treatment depends heavily on your business structure:

• Sole trader: drawings are straightforward - the business and you are the same legal person, so “drawings” are personal withdrawals (not wages).
• Partnership: partners may take drawings against their share of profit (again, not wages in the usual sense).
• Company: this is where things get more technical. A company is a separate legal person, so you can’t simply take money out whenever you want without a proper basis.

In a company context, what people call director drawings is often one of these things in the accounts:

• Salary/wages paid to you as an employee (with PAYE deductions),
• Director fees paid to you as a director,
• A dividend paid to you as a shareholder,
• A reimbursement for business expenses you personally paid, or
• A loan/advance from the company to you (recorded in a shareholder current account / director loan account).

If you’re operating as a company and taking drawings, the key question is: what is the payment actually supposed to be? That classification drives what paperwork you need and how it’s taxed.

If you’re still deciding whether a company structure is right for you, it can help to compare the basics of Operating As A Sole Trader versus running a company.

When Are Director Drawings Appropriate (And When Are They Risky)?

Taking money out outside a normal payroll cycle can be appropriate in some situations - but it’s also one of the easiest ways for small companies to accidentally create problems.

Director Drawings Can Work When…

• You’re taking money out as a temporary advance and it’s properly recorded as a loan or current account transaction.
• Your accountant is tracking the balance and you have a plan to square it up (for example, via salary, dividend, or repayment).
• The company remains solvent (able to pay its debts as they fall due) after the payment.

Director Drawings Are Risky When…

• You take money regularly “as needed” with no payroll, no records, and no clear tax treatment.
• The withdrawals put the business under cash pressure and create unpaid liabilities (like GST or PAYE).
• The company is trading while insolvent, or the withdrawals create issues with director duties under the Companies Act 1993 (for example, duties around acting in good faith and not trading recklessly).

A good rule of thumb: if the payment looks like “income” for the work you’re doing, it’s usually cleaner to treat it as a salary or director fee. If it’s profit distribution, it may be a dividend. If it’s neither, it may be a loan - but loans need to be tracked carefully.

Many business owners also find it helpful to understand the bigger picture of the different options in How Do Company Directors Get Paid?.

What Are The Main Legal Ways To Pay Yourself?

For most owner-managed companies in NZ, there are a few common “buckets” for paying yourself. The right mix depends on your profits, cashflow, tax position, and whether you’re a shareholder as well as a director.

1) Salary Or Wages (PAYE)

If you work in the business day-to-day, one of the simplest options is paying yourself a salary or wage just like any other employee. This generally means:

• running payroll,
• deducting PAYE and paying it to Inland Revenue,
• handling KiwiSaver obligations where they apply, and
• keeping proper pay records.

Even if you “own the company”, it’s still worth having clear paperwork for the working relationship - especially if the business grows, you bring in staff, or you want consistency across the team. Many businesses formalise this with an Employment Contract.

Why this option is popular: It’s predictable, it’s easy to budget for, and it usually avoids messy end-of-year balancing.

Where you need to be careful: If the company can’t actually afford the salary (especially when tax bills come due), it can create cashflow stress fast.

2) Director Fees

Director fees are payments to you as a director (for governance and oversight), rather than as an employee. In practice, many small businesses blur this line - but from a compliance perspective, it’s best to be clear about what capacity you’re being paid in.

Director fees can have specific tax treatment depending on how they’re paid and structured (including whether withholding obligations apply). Your accountant or Inland Revenue can guide you on what’s appropriate for your situation.

3) Dividends (As A Shareholder)

If your company is profitable, it may be able to pay dividends to shareholders. Dividends are not “wages” - they’re distributions of profit to shareholders.

In New Zealand, companies may be able to attach imputation credits to dividends (reflecting tax already paid by the company). Whether this is available and how it affects you is a tax question, so it’s worth confirming with your accountant.

However, dividends aren’t something you can just pay casually. You generally need to make sure:

• the company meets the solvency test under the Companies Act,
• the dividend is properly authorised, and
• it’s recorded correctly in your company records.

If you have multiple shareholders (or you might bring one in later), clear rules around decision-making and profit distributions are often covered in a Shareholders Agreement.

4) Reimbursements For Business Expenses

Sometimes you’re not “paying yourself” - you’re just getting paid back for costs you personally covered for the business (for example, software subscriptions, business travel, or supplies).

Reimbursements are generally fine, provided:

• the expense was genuinely for business purposes,
• you keep receipts/tax invoices, and
• it’s recorded properly in the accounts.

This is one of the easiest areas to get wrong if you mix personal and business spending. The cleaner your record keeping, the easier it is to stay compliant and defend deductions if questions come up later.

5) Director Drawings As A Loan (Director’s Loan / Shareholder Current Account)

This is what many people mean by “director drawings” in a company: you take money out, and instead of treating it as wages or a dividend right away, it’s recorded as a loan from the company to you.

This can be useful when:

• cashflow is uneven and you want flexibility,
• you’re waiting to confirm year-end profit before deciding between salary vs dividend, or
• you’re making regular personal withdrawals but plan to finalise the treatment later.

But you need to treat it seriously. If the director loan account grows and never gets repaid (or properly converted into salary/dividends), it can raise tax and compliance concerns - and it can create awkward issues if you later sell the company or bring in investors.

If you plan to use drawings in this way, speak to your accountant early so you understand how it will be treated for income tax and what reporting is required.

What Tax And Compliance Issues Should You Watch For?

Paying yourself is never just about moving money - it’s also about making sure you’ve met your obligations to Inland Revenue and kept company records in order.

Here are the main “watch outs” we see for small NZ companies.

PAYE And Payroll Compliance

If you pay yourself as an employee (or treat drawings as wages at year end), you need to make sure PAYE is handled correctly. The risk of ignoring payroll isn’t just a tax bill later - it can create penalties and interest and put the business under pressure.

If you have staff as well as paying yourself, it helps to keep your employment setup consistent and well documented across the board, including your Employment Contract arrangements.

GST Timing And Cashflow

If your company is GST-registered, you’ll have regular GST return obligations. A common problem is when drawings are taken out freely, but GST is left sitting in the bank account “looking like available cash”.

Practically, you’ll want to:

• separate GST in your cashflow forecasting (even if it’s in the same bank account),
• avoid large personal withdrawals close to GST due dates, and
• have a plan for tax payments before you increase your drawings.

Dividends And The Solvency Test

Dividends have to be paid lawfully. That generally means the directors need to be satisfied the company meets the solvency test immediately after the distribution.

Even if you’re the only director and shareholder, documenting that decision properly can matter - especially if anything ever goes wrong and your decisions are reviewed later.

Director Duties And Insolvency Risk

When money is tight, it’s tempting to keep drawing funds personally because you’ve “earned it”. But directors have legal duties, and when a company is near insolvency those duties become even more important.

Without getting too legalistic, the big idea is: you need to act in the best interests of the company, and you need to avoid causing harm to creditors. If the company can’t pay its debts, continuing to withdraw funds can become a serious issue.

If you’re unsure, it’s worth getting advice early - it’s almost always easier to fix these issues before they escalate.

How Do You Document Director Drawings Properly?

If you want to pay yourself confidently, documentation is your best friend. It doesn’t have to be complicated - but it does need to be clear.

Here are practical ways to keep things tidy and legally safer.

Keep Clear Company Records For Decisions

For many payment decisions (especially dividends, approving director fees, or recording a loan arrangement), it’s smart to document them through company resolutions.

For example, you might use a Directors Resolution Template to record key decisions and keep them with your company records.

This is especially important if:

• there’s more than one director or shareholder,
• you’re paying dividends, or
• you may later sell the business and need clean records for due diligence.

Separate Business And Personal Spending

This sounds basic, but it’s one of the biggest practical drivers of “messy drawings”. If you consistently use business funds for personal expenses (or vice versa), it becomes harder to:

• track what was drawings vs business expenses,
• prepare accurate financial statements, and
• defend deductions and tax positions if queried.

If you can, keep separate bank accounts and cards, and set a consistent process for reimbursements.

Use A Company Constitution And Shareholder Rules That Fit Your Business

Your internal governance documents matter more than many founders realise - especially once real money starts moving around.

A well-drafted Company Constitution can set out rules about director powers, shareholder rights, and decision-making processes.

And if there’s more than one owner (or you’re planning for growth), a Shareholders Agreement can help prevent disputes about how and when people get paid, what happens if someone exits, and how profits are shared.

Be Clear On “Loan” Terms If You Use A Director Loan Account

If your “director drawings” are being treated as a loan, ask your accountant what’s appropriate to document for your situation. Depending on the numbers and circumstances, it may be sensible to record:

• whether interest applies (and at what rate),
• repayment expectations, and
• what happens if the company is sold or a director leaves.

This is one of those areas where getting tailored advice early can save you a lot of clean-up later.

Plan For Growth (And Future Transactions)

Imagine this: your business is doing well and a buyer wants to purchase it, or an investor wants to come in. One of the first things they’ll look at is whether the company’s books make sense - including whether there’s a large director loan owing.

Clean payment systems and good documentation don’t just reduce legal risk - they also make your business easier to sell, fund, or scale.

Key Takeaways

• “Director drawings” is a common term, but in a company it usually needs to be treated as either salary, director fees, a dividend, a reimbursement, or a loan - the classification matters.
• If you run a company, you generally can’t just take money out informally without records; the company is a separate legal entity and payments need a lawful basis.
• Paying yourself via salary is often the cleanest option for regular income, but it requires payroll and PAYE compliance.
• Dividends can be effective when the company is profitable, but they must be properly authorised and the company must meet the solvency test.
• Using drawings as a loan/current account can work, but it needs careful tracking and a plan to repay or convert it - otherwise it can create tax and commercial issues.
• Strong internal documents like a Company Constitution and Shareholders Agreement can reduce disputes and clarify how payments and profit distributions should work.
• When in doubt, get advice early - it’s much easier (and cheaper) to set up a clean system from day one than to untangle messy drawings later.

If you’d like help setting up the right structure and documents so you can pay yourself confidently (without creating tax or compliance issues), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.