What is a Shareholder's Current Account? | Vivid Accounting | Chartered Accountants

A guide for NZ business owners

If you own a company in New Zealand, chances are you’ve heard about a shareholder’s current account. For many business owners, it sounds like technical accounting jargon best left to their accountant. But understanding and managing it well is important because it directly affects your tax position, cashflow and relationship with your company.

We’ll break down what shareholder current accounts are, how they works and why it is important to monitor carefully to avoid tax issues.

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What is a Shareholder’s Current Account?

A shareholder’s current account is an account which records the money flow between you (as the shareholder) and your company.

Think of it as a ledger or a virtual bank account inside your company’s books. It records:

Money you’ve put into the company (e.g., start-up funds, paying business expenses personally)
Money you’ve taken out of the company (e.g., drawings, repayments made to you, personal expenses paid by the company)

Credit vs. Debit: What your Balance Means

At any point in time, the shareholder current account can end up in either credit or debit:

Credit Balance (company owes you):
You’ve put more into the company than you’ve taken out. The company effectively owes you money.
Debit Balance (you owe the company):
You’ve taken more out than you’ve put in. This is called an overdrawn shareholder current account and that’s when tax issues can arise.

Why an Overdrawn Shareholder’s Current Account Matters

If you have an overdrawn shareholder current account, Inland Revenue may treat is as if the company has made you a loan. Depending on your situation, this can have different tax consequences:

If you are a shareholder and an employee of the company, the “loan” may trigger Fringe Benefit Tax (FBT). To avoid an FBT exposure, the company must charge you interest at Inland Revenue’s prescribed interest rate. Any interest charge increases the company’s taxable income.
If you are a shareholder but not an employee (and not associated with one), an overdrawn balance could be treated as a deemed dividend if interest has not been charged at the prescribed rate. This could result in additional personal tax for the shareholder (as well as have imputation credit implications).

Other Risks to Watch Out For

Liquidation – If the company is placed into liquidation, the liquidator can demand repayment of an overdrawn shareholder current account. In other words, shareholders may be required to personally repay these funds to help settle company liabilities.

Shareholder Fairness – Without proper tracking, disputes can arise between shareholders over who has contributed more or withdrawn more from the company.

Best Practice for NZ business owners

To stay on top of your shareholder’s current account:

Code accurately: Make sure all shareholder-related transactions are correctly coded in your accounting software.
Monitor balances: Monitor balances throughout the year, not just at the end of financial year.
Plan ahead: Talk with your accountant about the best way to structure withdrawals from the company, whether as salary, dividends or loan repayments.
Reconcile annually: Avoid large overdrawn balances by reconciling the shareholders current account annually and tidy it up with a shareholder salary, declaring dividends before the end of financial year.

Your shareholder’s current account is more than just a line on your balance sheet. It’s a record of your financial relationship with your company. Managed correctly, it gives flexibility and transparency. Managed poorly, it can create unexpected tax bills, Inland Revenue scrutiny and even personal financial risk.

If you’re unsure about your shareholder’s current account, or if it’s overdrawn, now is the time to get expert advice. Our team can review your position and recommend the most tax-efficient strategy. Contact us today.