As you may be aware, the top tax rate for individuals increases to 39% on 1st April 2021 for income over $180,000. As such, we are currently reviewing companies to consider whether it would be advantageous to pass a taxable dividend prior to the change in income tax rate.
We generally consider passing dividends for reasons such as:
- Cash is expected to be withdrawn from the company in the near future (either a lump sum or regular drawings)
- Cash has been withdrawn from the company which has overdrawn the shareholder advance accounts
- The business or a portion of it is being sold and the cash will be paid out to the shareholders
- The company is being wound up in which case all of the retained earnings need to be cleared out
- There is an expected change to the company shareholding which may breach shareholder continuity and result in lost imputation credits if not utilised prior to the shareholding change
When a company declares a dividend, the company is required to attach 33% tax credits for the shareholders. With the company tax rate at 28%, this normally requires companies to pay an extra 5% to top up the tax credits to 33%.
For some years, the top individual tax rate has been 33% so no additional tax has been payable by the shareholders on receipt of a dividend. However, with the top tax rate lifting to 39%, dividends that push a shareholders income over $180,000 will result in the shareholder having to pay an additional 6% tax. As such, in some instances it makes sense to pass the dividend before 31st March 2021.
Where the vast majority of the shareholding is held by your family Trust, a dividend is not necessary at this stage as the trust tax rate remains at 33%. However if any of the other reasons above apply to you, please get in touch with us as it may be appropriate to consider a dividend now.
We will be in touch with you if we think a dividend should be considered.