Understanding a Shareholder Current Accounts A Complete Guide for Business Owners

What Is a Shareholder Current Account and Why Does It Matter?

When you own a company in New Zealand, understanding the concept of a Shareholder Current Account is essential for proper financial management and tax compliance. This financial mechanism might seem complex at first, but it’s a fundamental part of the relationship between you and your business.

A Shareholder Current Account essentially functions as a record of the financial relationship between a company and its shareholders. It tracks money flowing in both directions – funds that shareholders contribute to the company beyond their initial share capital, and money that shareholders withdraw from the business.

The Basics of a Shareholder Current Account

At its core, a Shareholder Current Account is a loan account. When you register a company, you pay an initial share capital (often just $100), which appears under Equity on your company’s Balance Sheet. Any additional money you put into the company beyond this share capital is typically recorded as “funds introduced” in your Shareholder Current Account.

This distinction is important because it affects how these funds are treated from both accounting and tax perspectives. While share capital represents ownership, the Shareholder Current Account represents a debt the company owes to you as the shareholder.

How a Shareholder Current Account Works in Practice

Tracking Financial Movements

Throughout your company’s life, the Shareholder Current Account will record:

• Money you put into the company (increasing the account balance)
• Money you take out of the company (decreasing the account balance)

This ongoing record helps maintain clear boundaries between company finances and personal finances – a critical distinction since your company is a separate legal entity.

Understanding Drawings

As a shareholder, if you withdraw money from your company without paying PAYE, these withdrawals are called “drawings.” It’s important to remember that even if you’re the sole shareholder, your company’s money isn’t automatically your personal money. The company is legally separate from you.

Similarly, when you transfer money from your personal bank account to your company, this is recorded as “funds introduced” into the company.

Are Drawings Tax-Deductible?

A common question many business owners ask is whether drawings are tax-deductible for the company. The simple answer is no. Drawings are not tax-deductible expenses for your company, which is why you won’t see them appearing in your company’s Profit & Loss statements. Instead, they’re recorded in the Shareholder Current Account as movements of funds.

Managing an Overdrawn Shareholder Current Account

What Happens When You Take Out More Than You Put In?

While shareholders can take drawings from a company, problems arise when you withdraw more than you’ve contributed. This creates an “overdrawn Shareholder Current Account” – a situation that has tax implications.

When your Shareholder Current Account becomes overdrawn, your company must either:

1. Pay Fringe Benefit Tax (FBT) to Inland Revenue, or
2. Charge you (the overdrawn shareholder) interest at the IRD’s prescribed interest rate

The IRD sets this interest rate quarterly, and it becomes taxable revenue for your company – which actually increases your overdrawn balance further.

How to Fix an Overdrawn Shareholder Account

If you find yourself with an overdrawn Shareholder Current Account, you have several options to remedy the situation:

1. Repay the loan to the company – Simply transfer funds from your personal accounts back to the business.
2. Declare a shareholder salary – This requires the company to have earned sufficient profit to support the salary. Remember that shareholder salaries are taxable income for you personally.
3. Declare a dividend – This effectively converts the loan into a formal distribution of company profits.

You can use any one of these methods or a combination to clear the overdrawn balance. However, it’s important to note that options 2 and 3 are limited by your company’s retained earnings. Additionally, your company must remain solvent both before and after declaring any dividends or shareholder salaries.

Learn more about Dividends: Dividends and Imputation Credits

Best Practices for Managing Your Shareholder Current Account

To avoid complications with your Shareholder Current Account:

• Keep accurate records of all funds you put into or take out of the company
• Regularly review your Shareholder Current Account balance
• Plan major withdrawals in advance, considering tax implications
• Consult with your accountant before making significant changes to your Shareholder Current Account
• Consider formalizing substantial loans with proper documentation

When to Seek Professional Advice

Managing Shareholder Current Accounts can become complex, especially when dealing with:

• Multiple shareholders
• Company restructuring
• Succession planning
• Tax planning
• Business growth or contraction

In these situations, professional accounting advice becomes particularly valuable to ensure you’re maintaining compliance while optimizing your financial position.

Final Thoughts on Shareholder Current Accounts

Understanding your Shareholder Current Account is a fundamental aspect of running a successful company in New Zealand. It helps maintain appropriate boundaries between personal and business finances while ensuring tax compliance.

By staying informed about how these accounts work and proactively managing your financial relationship with your company, you can avoid unwelcome tax surprises and make more strategic decisions about your business finances.

If you have more questions about Shareholder Current Accounts or need assistance with managing yours, our team at Business Like NZ Ltd is ready to help. We specialize in simplifying complex financial concepts and helping business owners make smarter financial decisions.

Contact us today to discuss how we can support your business’s financial management and compliance needs.