Dividend payments expected to spike ahead of trustee tax rate rising

Accountants are encouraging clients to flush out retained earnings before the trustee tax rate goes up in April. Photo / 123RF

Dividend payments to shareholders are expected to spike ahead of the trustee tax rate going up to 39 per cent on April 1.

Accounting firm Baker Tilly Staples Rodway is advising companies owned by trusts to consider paying excess retained earnings to shareholders now, so this income is only taxed at 33 per cent.

“We’re certainly getting our clients to act,” the firm’s head of taxation services Mike Rudd said.

The Labour-led Government last year committed to hiking the trustee tax rate on April 1, 2024.

It did so to ensure it aligned with the top personal income tax rate of 39 per cent, introduced on April 1, 2021. The Government basically didn’t want people to use trusts to minimise their personal income tax bills.

Ahead of the new top income tax rate taking effect, companies made a flurry of dividend payments.

Inland Revenue data provided to the Herald shows dividends declared on resident withholding tax returns more than doubled in the year to March 31, 2021, to $28.7 billion, and then fell back to $18b in 2022.

Rudd believed there would be a similar spike in the current tax year, ahead of the trustee tax rate rising from April 1.

He was encouraging his clients to flush out any excess retained earnings to make the most of the 33 per cent trustee rate before it increases.

While there had been some debate among accountants over whether accelerating dividend payments could be considered tax avoidance, Inland Revenue a few weeks ago issued guidance clarifying it likely wouldn’t be.

“It is accepted that, subject to some constraints such as those imposed under the Companies Act 1993, companies can legitimately make decisions about whether or not, or the extent to which, they retain or distribute profits,” Inland Revenue said.

“Inland Revenue considers that where a company changes its dividend-paying policy while taking into account the funding needs of shareholders and applicable tax rates, this is unlikely, without more (such as artificial or contrived features), to be tax avoidance.

“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.”

Rudd welcomed the clarity, but was critical of Inland Revenue taking as long as it did to issue the guidance, which also covers other issues related to the trustee rate rising.

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.