Borrowing money for your company

Given a choice, it’s safer for a company to borrow money than its shareholders.

Inland Revenue has argued, successfully, that interest paid on money borrowed by shareholders for their  company is not a tax deductible cost for the company. This is because the company didn’t borrow the money.

Many companies have been caught out by this and had the unpleasant surprise of discovering interest had not been a tax deductible cost for some years. Inland Revenue has disallowed the expense, increased the taxable income and collected extra tax, together with a hefty Use of Money Interest charge.

It’s easy for an accountant not to notice the money has been borrowed by the wrong people.

So you’ve been warned. If your company needs to borrow money, make sure it’s indeed the company that does the borrowing.

If you find a loan is in your name, you can still do something about it.

  • Lend the money to the company and charge interest for the loan. The interest charged needs to be based on market and charging the same as the bank is charging is acceptable and the simplest. Unfortunately if the interest the company pays (excluding interest to banks) exceeds $5,000 in an income year RWT will have to be deducted and paid.
  •  An alternative is the money could have been borrowed as agent for the company.

In both cases the paperwork matters. Get professional help and get it right.

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