Let’s say your parents want to help you get ahead in life. They’ve lent you a big chunk of money — say, nearly a million dollars — to use in your business. There’s no formal loan agreement. No interest is being charged. It’s all been done on trust.
So far, so good... but here’s the catch.
You’ve taken that money and lent it to your own company. Maybe to buy some property, invest in equipment, or simply give the business some breathing room.
And now the IRD might start asking questions.
Here’s what’s going on, what you need to know, and how to avoid turning a generous family gesture into a tax headache.
1. Informal Loans Can Create Formal Problems
When money is lent, especially large amounts, it’s important to have things in writing. Even if it’s just Mum and Dad, the IRD sees this as a financial arrangement that could involve interest, tax, and reporting obligations.
Our recommendation: Always have a formal loan agreement in place. This protects everyone and helps avoid confusion or issues later on, especially if something happens to the lender.
2. What Is a Back to Back Loan Agreement?
This happens when money flows through multiple hands, like this:
Parents → You → Your Business
In this case, your parents lend money to you, and then you lend that money to your company. Each loan can have its own terms, but they are connected because your ability to repay your parents depends on your company paying you.
It becomes a back to back structure, where one loan supports another.
Now here’s where it gets tricky. If interest starts being charged, it flows in both directions.
For example:
Your parents charge you 5 percent interest
You then charge your company 5 percent interest (or more) to cover it
Each of these loans needs to be properly documented. Interest must be calculated accurately. And tax must be handled at each step.
Why this matters: The IRD sees these as separate legal agreements. If you don’t have them documented correctly, or if the interest doesn’t match up, deductions can be denied and the whole structure can come under scrutiny.
3. Withholding Tax (RWT) Can Get in the Way
In New Zealand, when someone earns interest, the person paying it usually has to deduct Resident Withholding Tax (RWT) and pass it to Inland Revenue. So if your company pays interest to you, and you pay interest to your parents, there’s RWT to consider at both levels. The RWT is similar to PAYE on employment income. Your employer deducts PAYE and pays it to IRD and you receive your net wage. In the case of interest, the borrower deducts RWT and pays it to IRD, and you pay the lender the net interest. If the interest you pay and receive is similar, this creates cashflow issues and extra admin for no real benefit (because you are having to deduct RWT).
Our advice: Apply for an RWT exemption if the numbers justify it. That way, you avoid paying tax unnecessarily and claiming it back later.
4. Create a Simple System for Repayments and Interest
Even if you are not repaying the loan right away, you’ll need to forecast what the monthly interest payments will look like and have a way to track them.
We usually set up a simple spreadsheet that:
Calculates interest automatically
Forecasts monthly payments
Allows you to enter lump sum repayments if needed
It’s also helpful to have someone designated, like a family member or accountant, to take over the monthly process once it’s set up.
5. Future Planning: What Happens If the Loan Is Forgiven?
Sometimes these loans are part of an early inheritance plan and may eventually be written off. If the loan had gone straight from your parents to your company, cancelling it later could create debt remission income, which is taxable income to the company. But if your parents lent the money to you, and you lent it to your company, then the personal loan can be forgiven without tax being triggered in the business.
That is why the back to back structure works well, but only if it is set up right, and you are compliant.
Final Thoughts
What started as a simple family loan can turn into a tangled web of tax, interest, and paperwork. But with the right advice, good documentation, and systems in place, it can be managed smoothly.
If you are in a similar situation — receiving or making family loans, or funding your company with personal capital — we can help you structure it properly, ensure compliance, and future proof it for peace of mind.
Contact Us
Contact us today to discuss on 07 827 9130 or email us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
