How To Pay Dividends To Shareholders In New Zealand

When your business finally starts generating real profit, it’s natural to ask: “How do we actually get this money out to the owners?” For companies, one of the most common (and most misunderstood) ways is to pay dividends to shareholders.

But paying dividends isn’t as simple as transferring cash from the company bank account to your personal account and calling it a day. In New Zealand, dividends are regulated (mainly under the Companies Act 1993 and tax rules), and getting it wrong can create issues for directors, shareholders, and your accountant.

This guide is written for small business owners and founders who want a practical, plain-English overview of how to pay dividends to shareholders in New Zealand the right way - including the legal steps, the solvency test, record-keeping, and the tax basics you’ll need to keep in mind.

What Is A Dividend (And When Does It Make Sense For Small Businesses)?

A dividend is a distribution of value by a company to its shareholders, in their capacity as shareholders.

Dividends are usually paid in cash, but they can also be paid in other forms (for example, transferring assets). Most small businesses think “dividend = cash payment”, and that’s what we’ll focus on here.

Dividends Vs Salary: Why The Difference Matters

If you’re an owner-operator, you might take money out of the business in a few different ways:

• Salary or wages (usually through PAYE if you’re an employee of the company).
• Shareholder salary (common for closely held companies; your accountant often helps structure this).
• Dividends (paid to shareholders based on shareholding, not hours worked).
• Repayment of shareholder loans (if you’ve loaned money to the company).

Each option has different legal and tax outcomes. Dividends are generally used when:

• your company is profitable and has cash available;
• you want to distribute profits to owners proportionately (or according to share classes); and/or
• you want a cleaner separation between “pay for work” (salary) and “return on investment” (dividends).

It’s also worth knowing that dividends are usually linked to how your shares are set up. If your share structure is unclear, or you’re not sure what rights attach to different shares, this is where your Company Constitution and your Shareholders Agreement can become very important.

Can Any Company Pay Dividends In New Zealand?

Not every business can (or should) pay dividends at any given time.

In New Zealand, dividends are mainly a “company” concept. If you operate as a sole trader or partnership, you generally won’t pay dividends - you’ll usually draw profit in other ways (because the structure is legally different).

For companies, whether you can pay dividends usually comes down to:

• your company’s legal documents (constitution, shareholder arrangements, share classes);
• your company’s financial position (you must meet the solvency test); and
• proper decision-making and documentation (director resolutions, records, and shareholder communications).

Check Your Constitution And Share Rights First

Before you decide how to pay dividends, check:

• what classes of shares exist (ordinary, preference, etc);
• whether any shares have preferential dividend rights;
• whether there are restrictions around distributions; and
• whether the constitution changes the default Companies Act rules.

If your company doesn’t have a constitution, the default rules under the Companies Act generally apply. If you do have one, it may affect how dividends are declared and paid - which is why having a properly drafted Company Constitution can save a lot of confusion later.

What Is The Solvency Test (And Why You Can’t Ignore It)?

The solvency test is the legal gatekeeper for dividends in New Zealand. Put simply: the company can only make a dividend distribution if, immediately after the distribution, the company can still pay its debts and has assets greater than its liabilities.

Under the Companies Act 1993, directors must be satisfied on reasonable grounds that the company will satisfy the solvency test.

The Two Limbs Of The Solvency Test

In practical terms, the solvency test has two parts:

• Liquidity test: the company is able to pay its debts as they become due in the normal course of business.
• Balance sheet test: the value of the company’s assets is greater than the value of its liabilities (including contingent liabilities).

This isn’t just a “tick the box” step. If dividends are paid when the company fails the solvency test, directors can face serious consequences, including personal liability.

What Directors Should Consider Before Approving A Dividend

Every company is different, but directors typically need to consider things like:

• current cashflow and realistic short-term forecasts;
• upcoming tax payments (GST, income tax, PAYE if applicable);
• seasonal variations (for example, if revenue drops in winter);
• existing debt obligations and loan covenants;
• any pending disputes or potential claims that could become liabilities; and
• whether the business is about to make a major purchase or hire additional staff.

If you’re paying dividends while also adjusting director pay, it can help to step back and look at the overall approach to owner remuneration (including wages, drawings, and shareholder salaries). In some cases, directors also need to make sure they’re properly documented in line with governance decisions - including the records you keep for decisions affecting shareholders.

Step-By-Step: How To Pay Dividends To Shareholders New Zealand Companies

If you want a clean process you can follow each time, here’s a practical step-by-step approach.

1. Confirm The Company Can Make A Distribution (And Has Cash)

Dividends are often paid from accumulated earnings, but “profit on paper” doesn’t always mean “cash in the bank”. Before you declare a dividend, you’ll want updated financials and a clear view of:

• retained earnings and reserves (if relevant);
• working capital needs; and
• cashflow forecasts for the next few months.

Your accountant will usually help here, especially around the tax flow-on effects.

2. Check The Constitution, Share Classes, And Any Shareholder Deal

Next, confirm who is entitled to receive dividends and in what proportions. If shareholders have agreed to special arrangements (for example, different economic rights, preference shares, or restrictions), those arrangements should be clearly documented.

This is where a properly drafted Shareholders Agreement is particularly useful, because it can reduce disputes like:

• one shareholder expecting dividends while the others want to reinvest;
• arguments about whether dividends should be paid evenly or based on shareholding;
• concerns about fairness where some founders work in the business and others don’t.

3. Directors Must Approve The Dividend (And Record That The Solvency Test Is Met)

In most cases, dividends are declared by the board (the directors), not by shareholders voting on it (unless the constitution says otherwise). The directors typically pass a resolution that:

• states the amount of the dividend and whether it’s per share;
• identifies which shares/classes it applies to;
• confirms the record date (who is entitled to receive it);
• confirms the payment date; and
• records that the directors are satisfied the company meets the solvency test.

For many small businesses, this is done as a written resolution and kept with the company records. If you don’t have a consistent template/process for this, a Directors Resolution can help you capture the right details and keep governance tidy.

4. Determine The Record Date (Who Gets The Dividend?)

The “record date” is the date you look at the share register to determine who is entitled to receive the dividend.

This matters if:

• shares have recently been issued or transferred;
• you’re mid-way through an investment round; or
• there’s any uncertainty about who is currently on the share register.

In other words, if you’re changing ownership or expecting it to change soon, timing matters. Paying dividends when your share register is out of date is an easy way to create disputes.

5. Actually Pay The Dividend (And Record The Transaction Properly)

Once the dividend is declared, you pay it on the payment date. Practically, this usually means an electronic transfer from the company bank account to each shareholder’s nominated account.

You’ll also need to ensure your accounting records reflect the dividend properly, including any withholding obligations (depending on shareholder details and how your accountant structures the distribution).

6. Give Shareholders The Right Information

Shareholders should receive clear notice of the dividend, including:

• the dividend amount;
• the payment date;
• any tax credits attached (if applicable); and
• any deductions/withholding.

This is partly about compliance, but it’s also just good business hygiene - it helps avoid confusion at tax time and reduces the risk of shareholder complaints.

Tax And Compliance Basics: What To Watch When Paying Dividends

Dividend tax can get technical quickly, and the right approach depends on your company, your shareholders, and how your accounts are set up. This section is general information only (not tax advice) - it’s a good idea to speak to your accountant and, where needed, check Inland Revenue guidance before you declare and pay dividends.

Dividends Are Usually Taxable Income For Shareholders

In general, dividends received by shareholders are taxable. The exact tax treatment depends on factors like:

• whether imputation credits are attached;
• the shareholder’s tax rate and status (individual, trust, company); and
• whether any Resident Withholding Tax (RWT) applies.

Imputation Credits (Why They Matter)

New Zealand’s imputation system is designed to reduce double taxation. If your company has paid income tax, it may be able to attach imputation credits to dividends.

In simple terms, that can mean shareholders receive a dividend with credits reflecting tax already paid by the company - which may reduce additional tax the shareholder would otherwise owe.

This is an area where your accountant is essential, because attaching imputation credits incorrectly can cause compliance issues and messy corrections later.

Resident Withholding Tax (RWT)

Depending on the type of dividend and the shareholder’s circumstances, the company may have an obligation to withhold tax and pay it to Inland Revenue.

If you’re paying dividends to multiple shareholders (especially if some are trusts, overseas investors, or other entities), you’ll want to confirm withholding requirements before you pay anything out.

Don’t Forget Other Legal Duties (Not Just Tax)

Dividend decisions also sit alongside broader director and company obligations. For example:

• directors must act in good faith and in the best interests of the company;
• directors must avoid reckless trading and ensure the company can meet its debts; and
• company records must be kept properly (including resolutions and shareholder communications).

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

Dividends are straightforward when your records, cashflow, and shareholder relationships are healthy. Problems usually come up when one of those pieces is shaky.

Mistake 1: Treating Dividends Like “Owner Drawings”

In a company structure, you can’t just take money out informally and label it later. If it’s a dividend, it needs to be properly declared and documented. If it’s salary, it needs to be treated as salary. If it’s a shareholder loan repayment, it needs to match the loan account.

Mixing these up can create tax risk and governance problems.

Mistake 2: Paying Dividends When The Business Can’t Really Afford It

Some businesses pay dividends because it “feels fair” to shareholders - then get squeezed when GST, provisional tax, rent, or supplier invoices fall due.

The solvency test is meant to stop this. But the practical fix is simpler: base dividend decisions on real financial forecasts, not just the current bank balance.

Mistake 3: Not Being Clear With Shareholders About Dividend Expectations

In a small company, shareholders often have different priorities. One shareholder may want regular dividends, another may want to reinvest for growth, and another might not be actively involved but still expects a return.

It helps to agree in advance how dividend decisions will be approached - which is one reason many companies put clear decision-making rules into a Shareholders Agreement.

Mistake 4: Ignoring Share Structure (Especially When Bringing In Investors)

As your company grows, you might issue new shares or create different share classes. That can change dividend rights dramatically.

If you’re issuing shares, buying shares back, or changing ownership arrangements, make sure your governance documents keep pace. Otherwise, dividends can become a flashpoint in shareholder disputes.

For example, if you’re restructuring ownership, a broader “company housekeeping” review can help ensure the right documents are in place and consistent, including your constitution and shareholder arrangements.

Mistake 5: Not Keeping Proper Resolutions And Records

Even if everyone “agrees” informally, you still want proper company records. If you ever face:

• an audit or investor due diligence;
• a dispute between shareholders;
• a sale of the business; or
• questions about director conduct,

your paperwork matters. Keeping clear director resolutions for dividends (and other major company decisions) can save you a lot of time and legal cost later. Using a consistent Directors Resolution approach is a simple way to stay organised.

Key Takeaways

• To pay dividends to shareholders in New Zealand, companies must follow the Companies Act rules, including directors approving the dividend and being satisfied the company meets the solvency test.
• The solvency test has two parts: the company must be able to pay its debts as they fall due, and its assets must exceed its liabilities immediately after the dividend is paid.
• Your share structure, Company Constitution, and Shareholders Agreement can affect who is entitled to dividends and how dividend decisions should be made.
• Dividends have tax consequences, and may involve imputation credits and withholding obligations, so it’s important to coordinate the legal steps with your accountant.
• Common mistakes include paying dividends without proper documentation, paying dividends when cashflow can’t support it, and creating shareholder disputes by not setting expectations early.
• Keeping clear governance records (including written resolutions) helps protect the company and directors and reduces friction when investors, buyers, or shareholders ask questions later.

If you’d like help setting up your company documents so you can declare and pay dividends with confidence, we can help. Reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.