How Dividends Work In New Zealand: A Legal Guide For Directors

If you run a company in New Zealand, at some point you’ll probably ask: “Can we pay dividends?” or “Should we be paying dividends instead of salaries?”

Dividends can be a great way to return value to shareholders. But they’re also an area where directors need to be careful, because dividends aren’t just a “money in the bank” decision - they’re a legal decision.

In this guide, we’ll break down how dividends work in New Zealand in plain English, including what directors need to check before declaring dividends, how the solvency test works, and the documents you should have in place so you’re protected from day one.

What Is A Dividend (And Why Do Companies Pay Dividends)?

A dividend is a payment a company makes to its shareholders as a return on their investment.

In practical terms, it’s a way for a profitable company to distribute some of its earnings (or sometimes other value) back to the people who own shares.

Companies typically pay dividends when:

• The company has generated profits and has more cash than it needs for working capital or growth;
• Shareholders expect a return (common in established, owner-operated businesses);
• The company wants flexibility - dividends can be paid from time to time, whereas salaries create ongoing payroll obligations;
• There are multiple shareholders and you want a clear, documented way to share value.

It’s worth remembering: dividends are paid to shareholders, not employees. If you’re working in the business, you might receive a salary (as an employee), director fees, and/or dividends (as a shareholder) - but each comes with different legal and tax implications.

Important: This article is a general legal guide only and isn’t tax advice. Dividend tax outcomes can depend on your company’s circumstances and shareholder details (including things like imputation credits and withholding obligations). It’s a good idea to speak with your accountant or tax adviser before declaring dividends.

If your ownership arrangements are informal (for example, you and a co-founder “just agreed” on split ownership), it can get messy quickly. A clear Shareholders Agreement can help prevent disputes about when dividends will be paid, what approvals are needed, and what happens if one shareholder wants to reinvest while another wants a payout.

Who Decides To Pay Dividends In NZ?

In New Zealand, dividends are usually declared by the board of directors, not automatically by shareholders.

That said, what your company can do depends on the legal documents governing your company, including:

• your company’s constitution (if you have one);
• any shareholders agreement;
• the terms attached to different share classes (if any); and
• the Companies Act 1993.

Many small businesses don’t have a constitution because it’s optional in NZ - but having one can make things much clearer, especially if you have (or plan to have) multiple shareholders or different classes of shares. Your Company Constitution can set rules about shareholder rights, director decision-making, and how distributions like dividends are handled.

Do All Shareholders Have To Agree?

Not always.

Some companies require a shareholder resolution for dividends (either as a rule in their constitution/shareholders agreement, or because of how directors and shareholders manage the business in practice). In other cases, directors can declare dividends without a shareholder vote, as long as they comply with the legal requirements.

This is where it’s important not to “wing it”. If you’re paying dividends in an ad-hoc way without clear governance, you can end up with:

• shareholder disputes (“why did they get paid and I didn’t?”);
• tax and accounting headaches; and
• risk that a dividend is later challenged as unlawful.

What Laws Apply To Dividends In New Zealand?

The key law is the Companies Act 1993. This Act sets out when a company can make distributions to shareholders (including dividends) and what directors need to do before approving them.

Dividends are one type of “distribution”. Under the Companies Act, a distribution can include things like:

• cash payments to shareholders (the classic dividend);
• transferring company property to shareholders for less than market value; and
• forgiving a debt owed by a shareholder to the company.

So even if you’re not paying out cash, you can still be making a “distribution” that triggers legal requirements.

Director Duties Matter Here

Approving dividends isn’t just an admin step. It’s a board decision that must be made in line with directors’ duties - including acting in good faith and in the best interests of the company, and not allowing the company to trade while insolvent.

If a dividend is paid when it shouldn’t have been, directors can face real exposure (including potential personal liability). That’s why it’s important to understand the solvency test before you pay anything out.

What Is The Solvency Test For Dividends?

Before a company can make a dividend payment, directors must be satisfied that the company will meet the solvency test immediately after the distribution.

This is the core legal gatekeeper for dividends in New Zealand.

In simple terms, the solvency test has two parts:

1. The Liquidity Test (Can You Pay Your Debts On Time?)

The company must be able to pay its debts as they fall due in the normal course of business.

This is a cashflow question. Even if the business is “profitable on paper”, you still need to consider timing - for example:

• Are large supplier invoices due next week?
• Is GST or PAYE due this month?
• Are customers slow to pay?
• Do you rely on an overdraft that could be reduced?

2. The Balance Sheet Test (Do You Have More Assets Than Liabilities?)

The value of the company’s assets must be greater than the value of its liabilities (including contingent liabilities).

This is more about the overall financial position. It can involve judgement calls, for example:

• What is your stock really worth (at liquidation value, not retail price)?
• Do you have upcoming warranty claims or disputes?
• Are there loans that might be called up?

Directors Usually Need To Sign A Solvency Certificate

In practice, directors commonly sign a solvency certificate (or resolution) confirming they believe the company satisfies the solvency test immediately after the dividend.

This isn’t just a formality - it’s written evidence that you turned your mind to the company’s solvency before approving the dividend. If things go wrong later, good board records can make a big difference.

If your company governance is still fairly informal, it can be a good time to get your basics sorted (including proper resolutions). For example, directors often also need a clear Directors Resolution process for major decisions, particularly once there’s more than one director or shareholder involved.

How Are Dividends Actually Paid (And What Do You Need To Document)?

Once you’ve decided a dividend is appropriate and you’ve satisfied the solvency test, the next step is paying it correctly and documenting it properly.

From a legal and governance perspective, you generally want to cover:

1. Check Your Share Structure

Dividends are usually paid proportionally to shareholding (for example, if you hold 60% of shares, you receive 60% of the dividend pool), unless your share rights say otherwise.

If you have different share classes (e.g. non-voting shares, preference shares, or different dividend rights), you’ll need to check what each class is entitled to.

If you’re planning to bring on investors or restructure ownership, it’s worth getting advice early - changing ownership and rights later can be harder than setting it up properly from the start. For example, if you’re reorganising equity between founders, you may need to document Changing Company Ownership properly so everyone is clear on who receives dividends and in what proportions.

2. Board Approval (And A Clear Paper Trail)

Typically, you’ll need a board resolution that:

• declares the dividend;
• states the amount (and whether it’s per share or total);
• records the date of payment;
• confirms the directors have applied the solvency test; and
• authorises someone to make the payments and complete tax/admin steps.

3. Keep Your Share Register And Records Up To Date

If your share register is outdated (or you’ve issued/assigned shares informally), you can end up paying dividends to the wrong person - and that’s not a fun problem to unwind.

When shares have been transferred, make sure it’s properly documented and recorded. This often comes up when an early co-founder exits or a family member is brought into the business. If that’s your situation, the mechanics of How To Transfer Shares should be handled carefully so the company’s records match reality.

4. Decide Whether It’s A Cash Dividend Or Another Type Of Distribution

Most small businesses stick to cash dividends because they’re straightforward.

But some companies may consider non-cash distributions (like transferring an asset). These can raise extra tax and valuation issues, and they still need to satisfy the solvency test. If you’re thinking about anything other than a simple cash payment, it’s a good idea to get tailored advice first (including tax advice).

Common Dividend Mistakes Small Businesses Make (And How To Avoid Them)

Dividends can be simple when your company is stable and well-run. The issues usually come up when dividends are treated like “owner drawings” without respecting company law and governance.

Here are some common traps we see for NZ SMEs.

Paying Dividends When The Company Can’t Actually Afford It

If you strip cash out of the company and then can’t pay suppliers, tax, or staff, you can quickly find yourself in risky territory.

Even if you’re confident the business will “bounce back next month”, directors still need to apply the solvency test at the time the dividend is paid.

Mixing Up Dividends And Salary

If you’re an owner-operator, you might be getting value out of the business through:

• salary/wages (employee income);
• director fees (governance-related payments);
• dividends (shareholder return); and
• reimbursement of expenses.

Each of these has different legal and tax treatment. For example, if you’re paying yourself as an employee, you’ll want a clear Employment Contract in place so it’s obvious what you’re being paid for and under what terms.

Dividends aren’t a substitute for payroll compliance. If you have staff (including working owners on payroll), your obligations around PAYE, KiwiSaver, leave, and minimum employment standards still apply. For anything tax-related (including how dividends are taxed compared to salary), it’s best to confirm your position with an accountant or tax adviser.

Paying “Dividends” To Someone Who Isn’t A Shareholder

This happens more than you’d think - especially in family businesses or where someone contributed time/money early on but never received formal shares.

If someone is meant to share in profits but they’re not actually a shareholder, there may be other structures that fit better (e.g. a contractor arrangement, profit share arrangement, or formal share issue/transfer). The right option depends on your situation, but the key is: document it properly so you don’t end up with competing expectations and disputes.

Not Having Clear Rules Between Shareholders

Imagine this:

You and a co-founder own 50/50. The company has a good year. You want to pay dividends because you’ve been living lean, but your co-founder wants to reinvest everything into growth.

Neither of you is “wrong” - but if you don’t have a clear agreement about how these decisions are made, you can hit a deadlock that harms the business.

This is exactly where a well-drafted Shareholders Agreement can set expectations early, including how profits are used, voting thresholds, and what happens if shareholders can’t agree.

Key Takeaways

• In New Zealand, dividends are payments (or other distributions of value) made by a company to its shareholders, usually as a return on investment.
• Directors generally decide whether to declare dividends, but you still need to check your company’s constitution, shareholder arrangements, and share rights.
• Before paying dividends, directors must apply the solvency test (both cashflow and balance sheet) to ensure the company can pay its debts and remains solvent immediately after the dividend.
• Dividends should be properly documented with board resolutions and clear company records, including an accurate share register.
• Common mistakes include paying dividends when the business can’t afford it, mixing dividends with salary obligations, and paying “dividends” to people who aren’t actually shareholders.
• Clear governance documents like a Company Constitution and Shareholders Agreement can prevent disputes and make dividend decisions much smoother as your business grows.

If you’d like help setting up the right shareholder documents, reviewing your company structure, or making sure dividends are declared correctly, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.