Just in time for Christmas: IRD announce retrospective tax grab that will brutalise farmers and SMEs

The Taxpayers' Union is slamming yesterday's quiet announcement on the IRD's Policy website that the Government intends to treat company loans to shareholders as income, resulting in a double taxation and the most dramatic tax grab on SMEs since the Muldoon era.

Taxpayers' Union Executive Director, Jordan Williams, said:

"This is an unprecedented attack on the tax arrangements of the farming and SME sectors."

"According to the documents, from yesterday the Government will now classify outstanding loans made by their businesses to their owners as taxable income of the owner, if not repaid within twelve months. But the owners are still legally required to repay the loan and must do so from future earnings and dividends which are taxable income. So, the owners are double taxed on the value of the outstanding loan and the interest payments."

"SMEs are the lifeblood of our economy. The way many SMEs operate is that during the year the company pays owners a regular amount to meet owner living costs. This is usually done by a loan from the company to the owner. At the end of the year, company accounts are drawn up. The loan to the owner is repaid by the company allocating either salary or dividends to the owner to repay the debt accumulated over the year."

"However, if the company does not make the expected profits to pay enough in salary or dividends to clear the loan the owner has spent on living expenses, the loan remains outstanding at the end of the tax year. Up until now, IRD would have just treated it as an outstanding loan owed to the business. But from today it will be treated as a dividend and taxed as income, if not repaid within twelve months."

"Suddenly, the tax burden on farmers and SMEs has shot up dramatically. The incentive for business owners never to incorporate or grow has just been magnified immensely."

"This will absolutely hammer farmers, and other capital intensive businesses that may run a negative current account. Treating a loan as income - and then taxing the dividends to pay it back again - is draconian. Even Muldoon would blush."

"The advice we've received is that this change will hit SMEs far harder than Labour's proposed CGT. Worse still, the law will be retrospective to cover the current tax year, announced not as part of a budget, but quietly on the IRD website. What on earth are Ministers thinking to sign this one off – and why haven't they fronted to what amounts to the biggest tax grab by a National-led Government since Muldoon?"