What’s your plan for dividend transfer?
Tax-effective transfer of dividends requires imputation credits Current tax rules require tax credits to be attached to most dividends at a rate of 33 per cent.
Directors of companies with retained earnings accrued over time need to understand that, eventually, they must distribute these earnings to the shareholders.
Retained earnings are shareholder funds that have not been transferred to the shareholders by way of dividend.
The most tax-effective transfer of dividends requires imputation credits (tax paid on profits the company has made in the past) to be available to attach to the dividend at the time it is declared.
It is often at the following times when the dividend requirement hits home:
When ownership is being transferred: The ability to utilise imputation credits when declaring dividends depends on shareholder continuity being at 66 per cent or greater so any shareholding changes greater than 34 per cent will result in imputation credits being lost.
On wind up: For a company to be able to wind up the retained earnings balance needs to be fully distributed to the shareholders.
Current tax rules require tax credits to be attached to most dividends at a
rate of 33 per cent. The imputation rate (the rate at which company tax is paid) is currently 28 per cent. This results in a 5 per cent difference between the two rates which is required to be paid at the time the dividend is declared — known as a dividend withholding tax payment.
Therefore, there is a likely cash consequence to the company in declaring a dividend to the shareholders, and if not anticipated, can often be seen as an additional tax burden.
For instance, a retained earnings balance of $300,000 would require an imputation credit balance of $116,666 and would result in a dividend withholding payment of $20,833.
Companies that consistently generate profits and accumulate retained earnings should have a dividend policy, or at the very least, be discussing annually what the future dividend plan is.
This becomes particularly important if part of the future includes transfer of ownership as part of a succession or retirement plan, or the company is going to wind up sometime in the future.
The point to note is that dividends are generally tax paid to 33 per cent in the hands of the shareholders so assuming the shareholder income is taxed at no more than 33 per cent there should be no further tax payment required by the shareholders.
Creating a plan regarding when dividends will be declared and how regularly also enables shareholders to understand the personal implications make informed financial preparations.
For personalised guidance for your circumstances and to create, or review your dividend plan, reach out to our team of experienced advisors at findex. co.nz.