The Tax Bill currently before Parliament will increase the trustee tax rate from 33% to 39% effective 1 April 2024. While the alignment of the trustee tax rate with the top marginal tax rate was the policy of the previous Labour government, the new National-led coalition government appears to intend to continue with this tax increase.

There may be modifications to the proposed anti-avoidance provisions and concessions from the 39% rate applying. However, we will not know the details of these until the Finance & Expenditure Committee reports back on the Bill in mid-March.

In anticipation of this tax rate increase for their trustee shareholders, many companies are considering whether to declare and pay a dividend before 1 April 2024 so that the trustees only pay tax at 33% on the dividend rather than 39% if the dividend is paid after 31 March 2024. Inland Revenue is aware that companies are likely to declare and pay dividends before 1 April in anticipation of the tax rate increase; the same thing occurred before the increase of the top personal marginal tax rate on 1 April 2021.

In Inland Revenue’s recently published guidance on the tax rate change, acknowledges that payment of a dividend in anticipation of the tax rate increase, in the absence of contrivance or artificiality, is unlikely to amount to tax avoidance. However, Inland Revenue will be vigilant in scrutinising paid dividends to prevent any actions that may be construed as tax avoidance. Actions that could give Inland Revenue grounds for alleging contrivance or artificiality include:

• Artificially altering the timing of taxable income or deductible payments to boost the retained earnings balance available for distribution, especially where this is contrary to contractual terms or established practice for requiring or making payment.

• Prepaying income tax to increase the imputation credits available for distribution in the absence of an existing tax liability.

• Post 31 March 2024, cancelling an existing dividend paying policy and making loans to shareholders which Inland Revenue could construe as the company making a substitution for the cancelled dividends.

In the absence of contrivance or artificiality, Inland Revenue is unlikely to challenge a dividend as tax avoidance. However, Inland Revenue may challenge the dividend on other grounds. One area that Inland Revenue has highlighted as a concern, which it used to challenge dividends paid before the 1 April 2021 tax rate increase, is ensuring that the company was in a position to pay a dividend and remains solvent following payment of the dividend.

Any dividend payment should not jeopardise the solvency of the company. This is a requirement of the Companies Act 1993 and a failure to comply with solvency requirements will invalidate the dividend. Therefore, it is essential to have evidence demonstrating the company's ability to meet its financial obligations and maintain asset values exceeding liabilities, including contingent liabilities. This is particularly the case if the company is relying on asset revaluations to establish its assets exceed liabilities.

Another crucial consideration is the timing of dividend resolutions and payments. Directors must declare the dividend on 31 March 2024 at the latest, preferably before this date given it is a Sunday and in the middle of Easter. However, this is insufficient to ensure the dividend is taxed at 33%. The company must pay the dividend to the shareholder on, preferably before, 31 March 2024 to ensure it is taxed at 33%. If cash payments are not feasible by 31 March 2024, a resolution stating the dividend is credited to the shareholder’s account on or before 31 March 2024 is necessary.

Given these complexities, directors must give careful consideration when contemplating dividend payments to trusts on or before 31 March 2024. Areas requiring careful attention include solvency, timing of resolutions and payments, retained earnings balances, and imputation credit account balances.

If you are contemplating paying dividends to a trustee shareholder before 31 March year-end, we strongly recommend you watch our NZ Year-End Tax Planning Webinar to go through everything you'll need to know, plus essential tax planning strategies to help you understand your compliance requirements and maximise your opportunities.

To get tailored advice for your specific circumstances, reach out to our Tax Advisory team today.

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