Shareholders pocket $9.4 billion, avoid $400 million in tax, without breaking law

Shareholders could splash out after saving as much as $404 million in tax last year after companies paid out $9.45 billion in dividends. Photo / Adobe stock

New Zealand's shareholders might have saved themselves as much as $404 million in tax last year, as their companies paid out a windfall $9.45 billion in dividends.

Somewhat mysteriously, that mammoth windfall of $9.43b - nearly as much as the entire economy grew in the year prior to the pandemic, and 291 per cent more than most annual dividend payments - came just before the Government promised to whack a new tax on high-income earners.

IRD reckons the two things are connected, and says the "likely driver" of the massive dividend payout was for shareholders to minimise their tax burden, saving them as much as $404 million.

In 2020, Labour passed legislation enacting a new top income tax rate of 39 per cent on any income earned over 180,000. This meant that from April 1, 2021, the top personal tax rate would increase from 33 per cent to 39 per cent. This also adjusted the rates at which dividends are taxed, with the precise rate depending on the person's income.

IRD thinks that companies, seeing that future dividends could be taxed by as much as 39 per cent, would have paid out multiple years of earnings to their shareholders before the new tax came into force.

This meant the maximum rate those earnings could be taxed by would be 33 per cent. In reality, the rate at which the dividends were taxed will vary depending on a person's individual circumstances.

"The likely driver behind paying out dividends in March 2021 was to ensure that they are subject to a maximum tax rate of 33 per cent and represent a number of years' of retained earnings rather than average income earning year in 2021.

"Companies are entitled to pay out dividends if they are in a position to do so. This was a legitimate option available for them," the paper said.

The paper was a check-in on the tax system, and published before final tax receipts had been filed.

Green Finance spokeswoman Chlöe Swarbrick said the paper showed the wealthy getting out of paying their fair share of tax.

"Wealthy shareholders are getting around paying their fair share of tax as tens of thousands struggle to put food on the table. It will not stop until Aotearoa New Zealand taxes wealth like we tax work," Swarbrick said.

She said Labour should be honest about the political decisions it was making.

"You cannot both want house prices to become more affordable but not want them to come down. You cannot both want an end to deep inequality while knowingly enabling policy that increases it," she said.

Revenue Minister David Parker said "it is not unexpected and legitimate if the companies have complied with their tax obligations. It is a one-off effect as we transition to the new 39 cent rate".

National's Finance spokesman Simon Bridges said National had warned about problems with avoidance.

"What we warned would happen in terms of legal avoidance of Labour's 39 per cent marginal tax rate has happened," Bridges said.

"This makes the policy a fail. It isn't raising the sort of revenue they hoped for and the envy component of it is also being got around".

Deloitte tax partner Robyn Walker said the large amount of dividends "does not come as a surprise and it's not necessarily anything which could cause alarm bells from a tax perspective".

She said taking profits out of a company prior to a higher tax rate starting "is really just a reflection that the income was earned at a time when the top tax rate was 33 per cent".

She added that people taking surplus funds out of a company opens that money up to taxation - if it was kept in the company it would not be taxed, "so making a decision to pay out retained earnings did actually result in more tax being paid than would otherwise have been the case if the funds remained in the company".