Dividend payments double to nearly $50 billion ahead of trustee tax rate rise

A tax minimisation strategy has ironically seen the Government’s tax take unexpectedly spike.

Companies owned by trusts appear to have flushed out excess retained earnings ahead of the trustee tax rate rising from 33 to 39 per cent on April 1, 2024 (for trusts that earn more than $10,000 a year).

The value of companies’ dividend payments more than doubled, from $23.6 billion to $49.4b, in the tax year to March 31, 2024, according to figures Inland Revenue gave the Herald.

Baker Tilly Staples Rodway’s head of tax services, Mike Rudd, in February told the Herald he was encouraging companies owned by trusts to pay out excess retained earnings to make the most of the 33 per cent trustee tax rate before it rose.

Not only would this lower their tax bills, but Rudd believed it was also a good way of freeing up money that could be reinvested.

Companies similarly flushed out excess retained earnings a few years ago, ahead of the Government introducing a new top income tax rate of 39 per cent for income over $180,000.

The value of companies’ dividend payments doubled in the 2020/21 tax year before the new rate took effect. It then dropped back down.

The previous Government decided to lift the trustee tax rate to prevent people from using trusts to avoid paying the top income tax rate.

The current Government softened the change a little by allowing trusts that earn less than $10,000 a year to keep paying tax at 33 per cent.

The spike in dividend payments that occurred just before the trustee rate change took effect was such that it contributed towards the Government collecting $1.7b (1.7 per cent) more tax in the 10 months to April 30 than the Treasury expected.

Another contributor to the overshoot was the fact more tax was paid on income from Portfolio Investment Entities (PIEs), such as KiwiSaver and other investment funds.

Rudd believed some trustees would, over time, shift their money to PIEs, as the highest tax rate applied to income from this type of investment is only 28 per cent.

He noted many individuals choose to invest in PIEs so they only pay 28 per cent on their returns, rather than their marginal income tax rates, which could be as high as 39 per cent.

Inland Revenue didn’t know whether trustees shifted money to PIEs ahead of the trustee tax rate rising, and whether this contributed towards the tax paid on PIE income surpassing the Treasury’s expectations.

Inland Revenue wouldn’t be surprised if trustees invested more in PIEs. Nor is it shocked companies owned by trusts have changed their dividend payments in response to the trustee tax rate rising.

Indeed, it issued advice earlier in the year clarifying that provided these actions aren’t contrived or artificial, they’d most likely be legal.

“An example of where Inland Revenue might have concerns is where, despite it being possible for a company to ‘pay’ a dividend by crediting shareholder current accounts, the company objectively has no real ability to pay those credit balances if it was to be liquidated,” Inland Revenue said.

* The headline and intro to this article have been amended to change the word trick to strategy. Use of the word trick was intended to mean a clever method, rather than anything devious. But following reader feedback we have made the change for clarity.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.