Director Loans In NZ: What They Are And How They Work

If you run your business through a company, it’s surprisingly common for money to move back and forth between you (as a director or shareholder) and the company.

Maybe you’ve covered a bill personally because cash flow was tight. Maybe you’ve drawn money out before the company’s profits are formally paid to you. Or maybe you’ve injected funds to help the business grow.

In many of these situations, what you’re really dealing with is a director loan.

Getting a director loan right matters, because it can affect your tax position, your records, your ability to raise finance, and even your director duties. Below, we’ll break down what director loans are in NZ, how they work in practice, and how to set them up properly so you’re protected from day one.

What Is A Director Loan?

A director loan is money that is lent between a company and a director (or, in some cases, someone closely connected to a director, depending on how the arrangement is structured).

In plain terms, it usually looks like one of these scenarios:

• You lend money to your company (for example, you transfer $10,000 into the company bank account to cover wages or rent).
• Your company lends money to you (for example, you pay personal expenses from the company account, or you take drawings that aren’t wages or declared dividends).

These transactions are typically recorded in your accounting system as a director’s current account (sometimes called a shareholder current account). That account shows whether the company owes you money, or you owe the company money.

Director loans aren’t automatically “bad” or “wrong”. They’re a normal part of running a small business. The key is making sure the loan is:

• properly recorded;
• authorised (where required);
• documented with clear terms; and
• managed in a way that doesn’t create unexpected tax or legal issues.

How Does A Director Loan Work In Practice?

Director loans tend to pop up when business owners are doing a bit of everything - managing cash flow, paying suppliers, investing in stock, and trying to pay themselves sensibly.

Here are common real-world examples of how a director loan works:

1) You Put Personal Money Into The Company

Let’s say your company has a quiet month and you need to cover the GST bill or a supplier invoice. You transfer money from your personal account into the company account.

In many cases, that payment is recorded as:

• a director loan from you to the company (the company now owes you that money); or
• a capital contribution (depending on how you structure things and what your accountant advises).

If it’s treated as a loan, you can usually withdraw it back later as a repayment of the loan (rather than salary or a dividend), assuming it’s properly recorded.

2) You Take Money Out Of The Company For Personal Use

Sometimes you might take money out because you need to pay yourself, but you haven’t run payroll yet, or you’re waiting on invoices to be paid. Or you might accidentally pay personal expenses using the company card.

If that money isn’t wages, a reimbursed business expense, or a properly declared dividend, then it can end up recorded as:

• a director loan from the company to you (meaning you owe the company); or
• an overdrawn current account (a red flag in some situations if it grows or stays unpaid).

This is where it’s especially important to slow down and get advice early, because the tax treatment and compliance expectations can be more complicated when the company is effectively funding a director personally (and IRD may scrutinise or recharacterise arrangements that aren’t properly documented or repaid).

3) The Loan Gets Repaid Over Time

A director loan isn’t just the moment money moves. It’s also what happens afterward.

For example:

• If the company owes you, it might repay you when cash flow improves.
• If you owe the company, you might repay it via bank transfer, by offsetting against salary/dividends (with proper records), or through agreed repayment terms.

From a business owner’s perspective, the main goal is to keep things clean, consistent, and defensible if anyone ever needs to review it (IRD, your accountant, a buyer, or a lender).

Do You Need A Director Loan Agreement In NZ?

Not every director loan is documented with a formal agreement in practice - but having a written director loan agreement is often a smart move, especially when the amounts are significant or the loan will be outstanding for a while.

A written agreement can help you:

• show there’s a genuine loan (not an undeclared distribution or messy “drawings”);
• set clear expectations about repayments;
• agree whether interest is payable (and at what rate);
• reduce disputes between co-directors or shareholders; and
• support your position during due diligence if you sell the business or bring in investors.

If you have more than one shareholder, documenting director/shareholder funding is even more important. Otherwise, you can easily end up with arguments like: “Was that money a loan?” or “Was it meant to be repaid before profits are shared?”

This is one reason many companies put the key rules in a Shareholders Agreement (for example, how shareholder loans are treated, whether interest applies, and what happens if someone exits).

It can also be helpful to check what your Company Constitution says about director powers, distributions, and decision-making - because the constitution and shareholders’ resolutions can affect what you’re allowed to do and how you should document it.

What Should A Director Loan Agreement Cover?

Every business is different, but a well-drafted director loan agreement commonly covers:

• Who the parties are (the company and the director/shareholder).
• Loan amount (or how future advances are treated).
• Purpose (optional, but sometimes helpful for context).
• Interest (whether interest is payable, the rate, and how/when it’s calculated).
• Repayment terms (on demand vs fixed term, instalments, repayment dates).
• Security (if any - many director loans are unsecured, but not always).
• Default consequences (what happens if repayments aren’t made).
• Approval and signatures (including any required company approvals).

Even if you’re a sole director/shareholder, it’s still worth documenting properly - especially if you plan to grow, raise finance, or sell later.

What Legal And Governance Issues Should You Watch Out For?

Director loans aren’t just accounting entries. They can raise real legal and governance questions, particularly when the company is lending money to a director.

As a director, you also have duties to act in the best interests of the company and to manage risks properly. In NZ, it’s also important to consider the Companies Act framework around directors’ duties and “interested director” transactions (including disclosure of interests and ensuring decisions are properly made and recorded). If you’re unsure about your responsibilities, it’s worth understanding how director liability can arise when decisions aren’t properly made or documented.

Director Loans And Conflicts Of Interest

When a company lends money to a director, there’s often an obvious conflict of interest - because you’re effectively on both sides of the transaction (the company’s decision-maker, and the person benefiting personally).

That doesn’t mean it can’t be done. It just means you should treat it carefully. Good governance steps may include:

• disclosing the conflict (for example, as an “interested director” under the Companies Act);
• recording approvals properly;
• ensuring the loan terms are fair and reasonable; and
• making sure the company can afford it (both immediately and longer-term).

If you have co-directors or shareholders, this becomes even more important - because they’ll likely expect transparency and proper decision-making.

Solvency And Cash Flow

Even if you “own” the company, the company is still a separate legal entity. If a company lends money out (including to a director), it can affect:

• its ability to pay suppliers and staff;
• its ability to meet tax obligations; and
• its overall solvency.

If the company is under financial stress, director loans can come under scrutiny later, including in disputes between shareholders or in insolvency scenarios.

Record-Keeping And Resolutions

From a practical perspective, you want your paperwork to match what’s actually happening.

Depending on the situation, you may need:

• board minutes or a directors’ resolution approving the loan (especially where a director is “interested” in the transaction);
• a signed loan agreement; and
• clear accounting records showing advances and repayments.

If you’re making decisions as the only director, it can still be useful to document them properly via a Directors Resolution (it helps show the decision was made intentionally and on what terms).

How Are Director Loans Taxed In NZ?

This is the part where it’s worth saying upfront: tax treatment depends heavily on the details, and it’s essential to get advice from your accountant and (where needed) a lawyer.

Important: Sprintlaw can help with the legal documentation and governance around director loans, but we don’t provide tax advice. The comments below are general information only, and you should get tailored advice from a qualified tax adviser/accountant (and check IRD guidance where relevant) before you act.

That said, here are the core tax themes business owners should be aware of when dealing with a director loan in NZ.

Director Loans Vs Salary Vs Dividends

One of the most common mistakes we see is when business owners treat “taking money out” as informal drawings, without clarifying whether those payments are:

• salary/wages (PAYE obligations apply);
• dividends (requires proper declaration and usually imputation credit considerations); or
• a loan (which should be documented and repaid).

If you blur these categories, you can create tax and compliance headaches later. For example, if a director/shareholder current account is persistently overdrawn (or repayments/terms aren’t properly documented), IRD may scrutinise whether amounts should be treated differently for tax purposes.

Interest And “Market” Terms

If the company lends money to a director, one question that often comes up is whether interest should be charged and, if so, whether it needs to be at a “market” rate.

This isn’t just a paperwork issue. Interest terms can affect how the transaction is characterised and how it’s treated from a tax perspective.

Getting the loan terms in writing helps show it’s a real loan arrangement and not just informal private use of company funds.

Fringe Benefit Tax (FBT) And Other Tax Issues

In some cases, benefits provided to employees or shareholder-employees can trigger FBT considerations or other tax implications. Whether a director loan can create an FBT issue depends on the structure and specifics.

Because this area can get technical quickly, it’s best to treat this article as your starting point, and then get tailored advice based on:

• your company structure;
• whether you’re also an employee;
• whether the loan is interest-free or below-market;
• how long the loan will remain outstanding; and
• how repayments will be made.

How Do You Set Up A Director Loan The Right Way?

If you want to keep things clean and future-proof (especially if you plan to grow, bring on a co-founder, or sell later), it’s worth treating a director loan like any other business arrangement: clearly agreed and properly documented.

Step 1: Decide What The Payment Actually Is

Before you label anything as a director loan, confirm what the payment is meant to be:

• Is it a reimbursement for business expenses you paid personally?
• Is it capital you’re contributing for long-term growth?
• Is it a short-term loan that will be repaid?
• Is it how you’re paying yourself (salary or dividend)?

This matters because each option has different legal and tax consequences.

Step 2: Document The Terms (Not Just The Bank Transfer)

Even if the company bank statement shows money moved, it doesn’t explain why it moved or on what terms.

A written director loan agreement (and, where appropriate, shareholder approvals) can make the arrangement clear, including:

• repayment expectations;
• interest (if any); and
• what happens if the director leaves the business.

If your ownership structure is changing (for example you’re bringing in a new shareholder, or one founder is stepping back), it’s also a good time to check whether you need to document the broader arrangement around shares and funding - including company ownership changes.

Step 3: Keep The Company’s Records Consistent

Good record-keeping isn’t just “admin” - it protects you.

At a minimum, you should aim for:

• a director’s current account that reconciles properly;
• clear supporting documents for payments (invoices, receipts, payroll records);
• minutes/resolutions for major decisions;
• clear conflict/interest disclosures where required; and
• separation between personal and business spending wherever possible.

If your director loan is part of a wider finance arrangement (for example, someone is lending to the company, or you’re securing funding), it might also interact with other legal documents such as a General Security Agreement, so it’s worth getting advice early.

Step 4: Plan For The “What If” Scenarios

It’s easy to set up a director loan when everyone’s getting along and the business is going well.

The real test is what happens if:

• cash flow tightens and repayments can’t be made on time;
• you bring in a co-founder or investor and funding priorities change;
• a director exits the business; or
• you decide to sell the business and a buyer reviews the balance sheet.

Director loans often come up in due diligence because they can materially affect the true financial position of a company. If a large amount is owed to a director, the buyer will want to know whether it will be repaid before settlement or left in the company.

If you’re considering a sale down the track, clean documentation now can make the process much smoother later - and can reduce last-minute disputes at settlement.

Key Takeaways

• A director loan is money lent between a company and a director (often tracked through a director’s/shareholder current account).
• Director loans commonly arise when you fund the company personally, or when you take money out of the company that isn’t salary or a declared dividend.
• Having a written director loan agreement can help clarify repayment terms, interest, and reduce disputes - especially if there are multiple shareholders or larger amounts involved.
• Director loans can raise governance issues (like conflicts of interest) and should be properly authorised, disclosed (where required), and recorded to support your director duties.
• The tax treatment of director loans depends on the details, and Sprintlaw doesn’t provide tax advice - so it’s important to align with your accountant and get legal advice where needed.
• Clean records and clear documents make director loans easier to manage - and can also help if you seek finance, bring in investors, or sell the business.

If you’d like help documenting a director loan, reviewing your company setup, or putting the right agreements in place for your shareholders and directors, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.