Important considerations before changing your company shareholders

Bringing a new partner into your business, rewarding a key employee with a stake, or passing the company down to the next generation are all exciting milestones. It’s easy to get caught up in the moment and think that changing who owns the shares is as simple as updating a form.​

However, a change in shareholding is a major business decision with significant financial and legal implications. We’ve seen clients make a quick change, only to face unexpected tax bills or complications down the line.​

Before making any shareholder changes, it’s crucial to understand what’s involved. Getting it right from the start protects everyone involved and saves a lot of future headaches. Here’s a simple rundown of the key things you need to consider.​

Does your company have tax losses from previous years? Normally, you can carry these forward to reduce tax on future profits. However, if your company's ownership changes by more than 51% (known as a breach of 'shareholder continuity'), you could lose the right to use those losses. ​

A ‘business continuity test’ may allow you to keep them, but only if there is no major change* in the business within 5 years of the change in shareholders/ownership.​

* Inland Revenue’s website has information on what ‘major change‘ means, but of course, these factors can be subjective so it's recommended you get advice.​

Think of imputation credits as a record of the tax your company has already paid on its profits. When the company pays out a dividend, these credits are attached to avoid double taxation and reduce the total tax shareholders pay on that income in their personal tax return.​

If the shareholding changes by more than 34%, the company can lose the entire outstanding balance of imputation credits. For shareholders, this means if a dividend is paid later, there won't be any tax credit attached. As a result, you'll be respionsible for paying tax at your full personal tax rate on that income when you file your tax return.​

You may think this isn't relevant if you don't regularly pay out dividends. However, on future wind up of the company, all company retained profits must be paid out to shareholders, so eventually it will cause a tax issue for you.​

Often, shareholders lend money to the company or borrow from it. This is tracked in a Shareholder Current Account. Before a shareholder leaves, this account must be settled. If the company forgives a debt owed by the shareholder, that amount could be treated as a dividend and become taxable.​

If your business is a look-through company, the profits and losses flow directly to the shareholders. A change in shareholders could affect this special tax status, so it’s vital to check with your accountant before making any changes.​

All share transactions must be recorded at a realistic price for tax purposes. Even if you’re passing shares to a family member, the IRD requires the transaction to be based on ‘fair market value’.  Your accountant can help you carry out a business valuation to determine this figure. This ensures the transaction is officially recorded at its true commercial value, regardless of the actual price paid.​

The number of shareholders also matters. If your company grows to have more than 10 shareholders, you could be required to prepare more complex and costly accounts under a standard called NZ IFRS. While you can opt out of this, you need to do so in time. It's a small detail that can create a big compliance headache if overlooked.​

If shareholding changes result in more than 25% of your company being owned by an overseas person or entity and you qualify as a ‘large’ company*, you are required to file audited financial statements each year. This is a significant cost and rarely adds any useful information to the business.​

* Large is where for two consecutive periods, the company’s assets are more than $60 million OR revenue is above $30 million.​​

When you reward employees by offering them shares in the company, this often falls under Employee Share Schemes which carry their own tax rules.​

If shares are gifted below market value, the difference between market value and what the employee actually pays for the shares is taxable for the employee. The discount is not a tax-free gift, but considered part of the employee’s income.​

These schemes can be tricky, so please consult your accountant or tax advisor before making any shareholding changes.​

While the tax and accounting side is critical, there are a few other things to be aware of when changing shareholders.​

1. Updating the Companies Office: Any change in shareholding must be officially recorded with the Companies Office within 20 working days.​

2. Shareholder Agreements: If you have a shareholder agreement, it’s a legally binding contract that must be followed. A good shareholder agreement outlines what happens if a shareholder wants to sell, passes away, or if there's a dispute. If you don't have one, now is the perfect time to get one drafted by a lawyer.​

3. Get Legal Advice: While your accountant manages the valuation and tax implications, a lawyer should handle any legal paperwork that needs to be reviewed and updated as part of the process.​

As you can see, there’s a lot to consider. Getting professional advice as part of the process helps ensure it’s a smooth and straightforward change and free of any surprises.​