How Directors’ Loans Work In New Zealand: Legal Rules For Directors

If you run a small company in New Zealand, there’s a good chance you’ll need to move money in and out of the business at some point. Maybe cashflow is tight and you need to cover bills. Maybe you’ve paid for business expenses personally. Or maybe you want to draw money out of the company while you’re getting established.

That’s where directors’ loans come in. Done properly, a director’s loan can be a practical, flexible way to fund your company or manage short-term cashflow. Done poorly, it can create tax headaches, disputes between shareholders, and (in worst-case scenarios) personal liability issues for directors.

This guide explains how directors’ loans (often called directors loans in New Zealand) commonly work, what legal rules to keep in mind, and the best-practice steps to document everything so you’re protected from day one.

Important: This article is general information only and not tax or accounting advice. Directors’ loans can have different tax outcomes depending on your structure and circumstances, so it’s worth speaking to your accountant (or the IRD) before relying on any approach.

What Is A Director’s Loan (And What Counts As One)?

A director’s loan is money that moves between a company and a director (or sometimes a director-related person/entity) and is treated as a loan rather than:

• salary or wages (employment income),
• a dividend,
• a reimbursement of expenses, or
• a capital contribution for shares.

In practical terms, directors’ loans usually show up in one of two ways:

1) The Director Lends Money To The Company

This is common when a company is starting up or experiencing cashflow gaps. You might transfer funds to the company bank account so the business can pay suppliers, rent, GST, or wages.

On the books, the company records a liability (it owes the director money).

2) The Company Lends Money To The Director

This can happen when a director draws funds out of the company that aren’t wages and aren’t a declared dividend.

On the books, the company records an asset (the director owes the company money).

Common “Director’s Loan” Situations Small Businesses Miss

Not every transaction is labelled “loan” at the time, but it can still end up being treated as one. For example:

• Paying personal expenses from the company card (and not reimbursing the company promptly).
• Covering business costs personally (and not reimbursing yourself promptly).
• Withdrawing funds regularly without a payroll setup or dividend paperwork.
• Using a shared account between you and the company (easy to do early on, but messy later).

The key point is this: even if you didn’t “intend” to create a loan, your accounts may effectively treat it as one. That’s why getting your structure and documentation right early matters.

Why Would A Company Use Directors’ Loans (And What Are The Risks)?

Directors’ loans are popular in SMEs because they’re flexible. But that flexibility can come with risk if you don’t set clear rules.

Common Reasons Directors Use Loans

• Startup funding: you want to inject funds without immediately issuing shares.
• Short-term cashflow support: bridging a gap until customer invoices are paid.
• Keeping payroll simple early on: you may not be ready to set up regular wages.
• Expense management: reimbursing the director for legitimate business costs.
• Flexibility between co-founders/shareholders: different people contribute funds at different times.

The Risks If You Don’t Document It Properly

In New Zealand, the “risk” isn’t just administrative. It can become a legal and tax problem. For example:

• Shareholder disputes: one shareholder may argue drawings were unfair or unauthorised.
• Director duties issues: if the company is struggling, transactions benefiting a director can be closely scrutinised.
• Insolvency risk: advancing funds to a director when the company can’t pay its debts can trigger serious consequences.
• IRD problems: poor records can increase the risk of issues in a review or audit, and may mean amounts are treated differently for tax than you expected.
• Sale/due diligence issues: messy directors’ loan accounts are a common red flag when selling a business or raising investment.

As a director, you also need to be mindful of your broader obligations and exposure. If you’re unsure where your risk line is, it’s worth reading about personal liability and how director decisions can create real-world consequences.

What Legal Rules Apply To Directors’ Loans In New Zealand?

There isn’t one single “Directors’ Loans Act” in New Zealand. Instead, directors’ loans sit at the intersection of:

• directors’ duties under the Companies Act 1993,
• your company’s internal governance rules (e.g. constitution and shareholder arrangements), and
• tax and record-keeping requirements (IRD and financial reporting).

Here are the key legal concepts to keep front of mind.

Directors Must Act In The Company’s Best Interests

Even in a small owner-operated company, a director’s role isn’t “it’s my company so I can do what I want.” Legally, directors must act in good faith and in what they believe to be the best interests of the company.

This matters when the company is lending money to a director, forgiving a director’s debt, or letting a director’s loan sit unpaid for a long time. If you want a plain-English explanation of these principles, fiduciary duty is a useful concept to understand because it frames why directors must avoid using their position for improper personal benefit.

Solvency And “Can The Company Actually Afford This?”

A practical rule of thumb is: if taking money out (or agreeing to generous loan terms) could put the company in a position where it can’t pay its bills, you need to slow down and get advice.

Directors can be exposed if they allow the company to trade while insolvent or enter into obligations without a reasonable basis to believe the company can perform them.

Company Governance: Constitution And Shareholder Expectations

Your company’s internal documents can affect what approvals you need and what you can do with company money.

For example, your Company Constitution may set out decision-making rules, shareholder rights, and processes for director decisions. And if you have multiple owners, a Shareholders Agreement often sets expectations around drawings, dividends, related party transactions, and what happens if someone wants repayment.

If you’re in business with others, directors’ loans are one of those areas where “we’ll sort it out later” can quickly turn into a dispute. Clear documents reduce the risk of misunderstandings.

Conflicts Of Interest And Related Party Dealings

A director’s loan is, by nature, a related party transaction (it involves the company and a director). That doesn’t automatically make it “not allowed”, but it does mean you should be extra careful about:

• whether the loan terms are fair to the company,
• whether proper approvals were obtained, and
• whether the transaction is properly recorded (including in board minutes/resolutions).

Under the Companies Act 1993, directors also generally need to disclose their interest in a transaction with the company, and the company should properly record that disclosure. Depending on your constitution and shareholder arrangements, you may also need additional approvals (for example, where shareholders have agreed that related party transactions must be approved).

In a small business, these steps can feel formal, but they’re the kind of “boring admin” that protects you later if a shareholder, liquidator, or the IRD ever asks questions.

How Do You Set Up A Director’s Loan Properly? (A Practical Checklist)

If you want your directors’ loan arrangements to stand up under scrutiny, the goal is simple: be clear, be consistent, and document everything.

Here’s a best-practice approach.

1) Decide What The Transaction Is (Loan vs Wage vs Dividend vs Reimbursement)

Before money moves, decide what it is. Many problems start when a director takes funds assuming it’s “just drawings,” while the accountant later has to decide how to classify it.

• Reimbursement is usually cleanest where you have receipts and it’s clearly a business expense.
• Wages require an employment/payroll approach (and PAYE obligations).
• Dividends require proper dividend documentation and solvency considerations.
• Loans require loan terms and tracking of repayments/interest.

If the director is also doing day-to-day work in the business, it’s also worth getting the employment side right with an Employment Contract, so payments aren’t accidentally treated inconsistently.

2) Record The Decision With A Director/Board Resolution

Even if you’re a sole director, it’s smart to create a written record that the company has agreed to the loan and its terms (and, where relevant, that any director interest has been disclosed and noted).

This is usually done via a written resolution and kept with the company records. A Directors Resolution is a practical starting point, particularly where you want to show that the company decision was considered and properly authorised.

3) Put A Written Loan Agreement In Place (Yes, Even If It’s “Your Own Company”)

A directors’ loan should have clear terms, just like any other loan. A tailored Loan Agreement helps avoid confusion and proves what was agreed if relationships change later.

Common terms to include are:

• Principal amount: how much is being loaned.
• Purpose: optional, but can help show legitimacy.
• Interest: whether interest applies, how it is calculated, and when it is paid.
• Repayment terms: on demand, by instalments, or by a set date.
• Default provisions: what happens if repayment isn’t made.
• Set-off provisions: whether the company can set off amounts owed (common if there are mutual payments).
• Signatures and capacity: making sure signing is done correctly (especially where the director is on both sides).

Getting this right is especially important if you have multiple directors/shareholders, or if you plan to sell the business later.

4) Consider Whether The Loan Should Be Secured

Sometimes a director lends a substantial amount to the company and wants protection if the company fails. In those cases, it may be appropriate to take security (for example, over company assets).

Whether security is appropriate depends on your structure, other creditors, and what’s fair to the company and its shareholders. If security is taken, you may also need to think about registration under the PPSR (Personal Property Securities Register). (This is one of those areas where tailored advice is important.)

5) Keep Clean Accounting Records And Reconcile Regularly

This is the unglamorous part, but it’s where many directors’ loans fall over.

At minimum, make sure:

• transactions are coded consistently in your accounting software,
• you keep receipts for reimbursements (so they don’t get treated as loans),
• the director’s loan balance is reviewed regularly (monthly is ideal), and
• repayments are clearly recorded.

If you’re ever audited, in a shareholder dispute, or going through due diligence for a sale, clean records can save you a lot of time and cost.

Tax And IRD Considerations: What You Need To Watch

Tax treatment can get complicated quickly, and the right approach depends on your company’s circumstances. The safest mindset is: assume the IRD will expect clear documentation and a consistent, supportable position.

Here are the common pressure points to watch with directors’ loans in New Zealand companies.

Interest (And Whether It Should Be Charged)

A key question is whether the loan should carry interest. Sometimes interest is charged to reflect a commercial arrangement. Other times it isn’t, particularly in very small, closely held companies.

However, whether interest is charged (and how it’s documented) can affect the tax and financial reporting outcome depending on who owes who, the amounts involved, and how the company is structured. It’s worth discussing with your accountant early so you don’t end up “fixing” it later.

Drawings Aren’t Automatically “Tax-Free”

A common misconception is that taking money out as a “loan” avoids tax. In reality, if the arrangement isn’t genuinely treated as a loan (including clear terms and a realistic repayment approach), there’s a risk the amounts may be treated differently for tax purposes than you intended.

This is why your paperwork and accounting treatment need to match what’s happening in real life.

Overdrawn Director Loan Accounts

If the company lends money to a director and the balance keeps increasing (or sits unpaid for a long time), this can become a red flag. Even if it started as a short-term solution, it can raise questions about:

• whether the company is effectively funding a director personally,
• whether proper approvals and disclosures were made, and
• whether the company’s cash position is being managed responsibly.

If this sounds familiar, don’t panic - it’s common in SMEs. The best step is to get advice early, tidy up the documentation, and put a realistic repayment plan in place.

GST And Expense Reimbursements

Where the director pays for business expenses personally, you generally want those payments treated and recorded as reimbursements (with receipts) rather than a messy running loan account that blends personal and business spending.

From a practical perspective, clean reimbursement processes also make it easier to support your GST position and your end-of-year accounts. Your accountant can help confirm the right process for your situation.

Key Takeaways

• Directors’ loans are a common and legitimate way to move funds between a company and a director, but they need to be clearly classified (loan vs wage vs dividend vs reimbursement).
• For directors’ loans in New Zealand, good documentation is the difference between “simple cashflow tool” and “serious dispute/tax problem.”
• Even in an owner-operated company, directors must act in the company’s best interests and consider solvency before approving loans or allowing large drawings.
• A written loan agreement and a written director resolution help prove what was agreed, when, and on what terms (and help show appropriate disclosures/approvals were made for related party transactions).
• If there are multiple shareholders, clear governance documents (like a constitution and shareholders agreement) can reduce disputes about who can take money out and when.
• Tax treatment can be complex, especially for overdrawn director loan accounts or loans without interest, so it’s worth getting legal and accounting advice early.

If you’d like help documenting a director’s loan properly (or cleaning up an existing director’s loan account), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.