Dividends – get the basics right

When the top personal tax rate for individuals increased to 39% from 1 April 2021, it was not surprising to see an increase in the number and quantum of dividends declared by companies (owned by individuals) in the lead up to the change.

With the anticipated increase in the Trust tax rate from 33% to 39% from 1 April 2024 next year (for trusts with a 31 March balance date) it is likely a similar increase will occur. Given the expected 6% difference in tax payable it is reasonable to assume Inland Revenue will review any dividend payments it happens to encounter as part of their audit activity. Worst case, Inland Revenue could assert a dividend was not ‘properly’ documented and therefore not legally effective or the process followed meant that it was “derived” by the trust after the 39% rate came into effect. It is therefore important to get the basics right.

Most companies and accountants have standard templates, it is a good idea to check these are up-to-date with current legislative requirements as these do change over time.

A company is generally able to attach imputation credits (comprising previous tax paid) to a dividend, and where it is being paid to a trust that does not hold a certificate of exemption from resident withholding tax (RWT), RWT will need to be withheld and paid to Inland Revenue by the 20th of the month following payment. A late payment of RWT would comprise a potential ‘flag’ that a dividend was not properly executed ‘on-time’.

Dividends are not always paid in cash. It is common for a company to declare a dividend and credit the amount to its shareholders’ current accounts. The process of journalling the dividend can comprise “payment” as it provides the mechanism or entitlement for a shareholder to extract cash from the company in the future or is often used to clear an ‘overdrawn’ shareholder current account. A potential risk is that if the journalling is completed late, say after 1 April next year, the dividend income could in fact be derived at that time and therefore taxable at 39%. If a dividend is to be paid in cash, it should be paid prior to 1 April 2024.

Some may try to argue the date of the dividend resolution is sufficient. However, rather than rely on a ‘view’, paying the cash or entering the journal should put the matter beyond doubt.

Care and attention need to be taken, to ensure getting the basics wrong does not cause a problem.

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