When helping family creates unexpected tax bills

You’ve worked hard to build your business. Your farming operation or rural enterprise is doing well, and naturally, you want to help family members when they need it. Maybe your daughter needs help with a house deposit, or your brother-in-law wants to upgrade his ute. Your company has the cash, so why not lend it at a low interest rate?

It seems straightforward, but the IRD has specific rules about company loans to family members. Get it wrong, and you could face an unexpected tax bill through deemed dividends. Understanding these rules can save you thousands of dollars and considerable headaches.

The Two Key Tax Rules You Need to Know

When a company makes a low-interest or interest-free loan, two potential tax treatments come into play: Fringe Benefit Tax (FBT) and the dividend rules. Which one applies depends entirely on the relationship between your company, you as a shareholder, and the person receiving the loan.

FBT: The Employee Connection

Fringe Benefit Tax applies when a company provides benefits to employees, including low-interest loans. The FBT rules cast a wide net—they don’t just cover direct employees but also shareholder-employees and people associated with employees.

However, here’s the critical point: if neither you nor your family member receiving the loan are employees of the company, FBT doesn’t apply. Many farming families structure their operations so shareholders don’t draw salaries—instead taking dividends or other distributions. In these situations, the company loan won’t trigger FBT obligations.

The Dividend Rules: Where Family Gets Complicated

This is where things get interesting for family loans. Under New Zealand tax law, when a company makes a low-interest or interest-free loan to a shareholder or someone associated with a shareholder, it creates what’s called a “deemed dividend.”

The logic is straightforward: by providing money at below-market interest rates, the company is effectively transferring value to the shareholder. The IRD treats this value transfer as if the company paid out a dividend, even though no actual dividend was declared.

Who Counts as “Associated”?

The critical question becomes: who is considered associated with you as a shareholder? The Income Tax Act defines associated natural persons using the “two degrees of blood relationship” rule.

You’re associated with someone if:

• They’re within two degrees of blood relationship to you
• They’re your spouse, civil union partner, or de facto partner
• They’re within two degrees of blood relationship to your spouse, partner, or de facto partner

Understanding Degrees of Blood Relationship

This is where many business owners get confused. Here’s how to count degrees:

First degree relatives:

• Your parents
• Your children
• Your siblings

Second degree relatives:

• Your grandparents
• Your grandchildren
• Your nieces and nephews (through your siblings)
• Your aunts and uncles

Third degree relatives:

• Your great-grandparents
• Your great-grandchildren
• Your first cousins
• Your grand-nieces and grand-nephews

Real-World Example: The Family Loan Scenario

Let’s look at a practical example that mirrors many farming family situations. John and Sarah own JB Farm Ltd. They’re shareholders but don’t take salaries—instead drawing dividends when the farming operation allows.

The company is considering three loans:

1. A loan to Sarah’s brother at 4% interest
2. A loan to their daughter at 4% interest
3. A loan to John’s nephew at 0% interest

None of these family members work for the company. What are the tax implications?

Sarah’s brother: This is a first-degree blood relationship (sibling), so Sarah’s brother is an associated person. The 4% loan rate is below the FBT prescribed rate of 6.67%, creating a deemed dividend.

Their daughter: Again, this is a first-degree relationship (child), making her an associated person. The deemed dividend rules apply here too.

John’s nephew: Here’s where it gets interesting. A nephew represents a third-degree blood relationship (you → your sibling → their child = three steps). Because this exceeds two degrees, John’s nephew is NOT considered an associated person. Therefore, the interest-free loan doesn’t create a deemed dividend, despite being more generous than the other loans.

Calculating the Deemed Dividend

When a deemed dividend arises, you need to calculate how much. The formula uses the difference between:

• Interest at the FBT prescribed rate (currently 6.67% from July 2025), and
• Interest actually paid by the borrower

For example, on a $100,000 loan at 4% interest to an associated person:

This deemed dividend is treated as income for the recipient and may affect their tax obligations. It also uses the company’s imputation credits, which could have been used for actual dividend payments.

Practical Implications for Your Business

These rules have real consequences for how you structure family assistance:

For loans to children, siblings, parents, or grandchildren: Expect deemed dividend treatment if you’re charging below-market rates. You might want to charge the full FBT prescribed rate to avoid this, or factor the deemed dividend into your planning.

For more distant relatives: Nieces, nephews, cousins, and other third-degree or more distant relationships won’t trigger deemed dividends. However, ensure you’re documenting these loans properly as genuine commercial arrangements.

Documentation matters: Whatever you decide, maintain proper loan documentation including terms, interest rates, repayment schedules, and security. This protects both the company and the family member, and demonstrates to IRD that these are genuine loans, not disguised distributions.

Alternative Strategies to Consider

If you want to help family without creating deemed dividend complications, consider these alternatives:

Pay yourself a dividend first: Take the money out of the company as a dividend to yourself, pay the appropriate tax, then make the personal loan to your family member. This avoids the company loan rules entirely.

Charge the prescribed rate: If you charge at least the FBT prescribed rate (6.67%), no deemed dividend arises. The family member pays more interest, but you avoid the complexity.

Consider guarantees instead: Rather than the company lending directly, the company might guarantee a family member’s bank loan. This has different tax implications and should be discussed with your accountant.

Gift instead of loan: In some situations, making an outright gift might be clearer and simpler than a low-interest loan, though this has its own tax and relationship property considerations.

The Bottom Line

Company loans to family members sit at the intersection of business, family, and tax law—three areas that can create complications when they overlap. The two-degree blood relationship rule provides a bright line, but its application isn’t always intuitive.

Before your company makes any loan to a family member, talk to us at CMK Accountants. We can help you:

• Determine whether FBT or dividend rules apply
• Calculate potential deemed dividends
• Structure the arrangement to achieve your goals with minimum tax impact
• Prepare proper documentation to protect everyone involved

What seems like a simple family favor can create complex tax obligations. Twenty minutes of planning can save you thousands of dollars and prevent IRD complications down the track.

Key Takeaways

• Company loans to non-employees avoid FBT but may trigger dividend rules
• The “two degrees of blood relationship” rule determines who’s associated
• Siblings, children, parents, and grandchildren are associated (deemed dividend applies)
• Nephews, nieces, cousins are NOT associated (no deemed dividend)
• The FBT prescribed rate (6.67%) is used to calculate deemed dividends
• Proper documentation is essential for all family loans
• Always get advice before structuring company loans to family