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Trust Wind-Ups: The Hidden Tax Trap That Could Cost You Thousands
25/03/2026
If you're thinking about winding up your family trust following the changes to New Zealand's top personal tax rate, you're not alone. Many Kiwi families are reassessing whether their trust structure still makes sense now that the top rate has jumped to 39%.But before you make any moves, there's a critical tax trap you need to know about — one that could see you paying tax twice on the same income.The issue? When your trust owns shares in your family company, and you transfer those shares as part of winding up the trust, you could inadvertently forfeit valuable imputation credits. For many family businesses, this could mean tens of thousands of dollars in unnecessary tax.What Are Imputation Credits and Why Do They Matter?
Imputation credits are New Zealand's way of preventing double taxation. When your company pays tax on its profits, it receives imputation credits that can be passed on to shareholders when dividends are distributed. These credits ensure that income isn't taxed twice — once at the company level and again in your hands.Think of imputation credits as proof that tax has already been paid. When you receive a dividend with imputation credits attached, you get a credit for the company tax already paid, reducing or eliminating your personal tax liability on that dividend.For most family businesses, these credits represent a significant tax benefit. Lose them, and you'll pay full tax on dividends that have already been taxed at the company level — effectively being taxed twice on the same money.The 66% Continuity Rule: Where Things Go Wrong
Here's where the trap lies.Under New Zealand tax law, to maintain your imputation credits, your company must maintain "continuity of shareholding" of at least 66%. This means that from the date the company paid the tax that created those credits, through to the date you want to use them, at least 66% of the shareholding must remain in the same hands.Put another way: if the shareholding changes by more than 34%, your imputation credits are forfeited. Gone. Wiped out.When you wind up a family trust and transfer shares from the trust to individual beneficiaries, you're creating a shareholding change. If those shares represent more than 34% of the total shareholding, you've just triggered the forfeiture rule.Real-World Example: The Mitchell Family Farm
Let's look at a typical scenario.The Mitchell family runs a successful dairy operation through Mitchell Farms Limited. Twenty years ago, they set up a family trust that owns 100% of the company shares. Over the years, the company has retained earnings of $800,000 and has accumulated imputation credits of $224,000 (based on the 28% company tax rate).Now, with the top personal tax rate at 39%, the Mitchells' accountant suggests winding up the trust. The plan is to distribute the shares to John and Susan Mitchell directly. Sounds straightforward, right?The problem: transferring 100% of the shares from the trust to John and Susan is a shareholding change that exceeds the 34% threshold. The moment that transfer happens, all $224,000 of imputation credits are forfeited.Later, when they eventually wind up Mitchell Farms Limited, they'll need to distribute those $800,000 of retained earnings as dividends. Without the imputation credits, they'll pay full personal tax on that amount.If they're in the 39% tax bracket, that's $312,000 in tax — compared to just $88,000 if they'd preserved the imputation credits.The difference? A staggering $224,000.The Cumulative Effect: Past Changes Matter Too
Here's an even trickier aspect that catches many people out.You need to maintain that 66% continuity from the date the tax was paid all the way through to when the credit is used. This means you must look back at any shareholding changes that have already occurred.Perhaps you brought in a business partner five years ago, transferring 20% of the shares to them. Or maybe you gifted some shares to adult children as part of your succession plan. Each of these events counts toward the 34% threshold.If you've already had shareholding changes in the past, even a small additional change when winding up the trust could push you over the edge and trigger the forfeiture of credits.The Solution: Declare Dividends Before You Change Shareholding
The good news is that this problem is entirely preventable if you plan ahead.The solution is straightforward: declare a dividend and use up your imputation credits before you change the shareholding structure.Going back to our Mitchell family example, they should have Mitchell Farms Limited declare a fully imputed dividend of $800,000 while the family trust still owns the shares. The trust receives the dividend with $224,000 of imputation credits attached. After the dividend is paid and the credits are used, they can then safely transfer the shares from the trust to John and Susan without losing any value.The sequencing is crucial:
What Happens If You Get It Wrong?
If you wind up your company after forfeiting imputation credits, here's what happens:When a company is liquidated, all retained earnings must be distributed as dividends to shareholders. These dividends are taxable income in your hands. Without imputation credits to offset the tax, you'll pay your full marginal tax rate on these distributions — despite the fact that the company has already paid 28% tax on that income when it was earned.This is the double taxation that imputation credits were designed to prevent. And it's completely avoidable with proper planning.Red Flags: When to Seek Advice Immediately
Contact your accountant before winding up your trust if any of these apply:
Key Takeaways for Family Business Owners
Winding up a family trust isn't just about distributing assets and closing the trust deed. When company shares are involved, the tax implications can be significant and long-lasting.Before you take any steps to wind up your trust:
The cost of getting this wrong can be enormous — potentially hundreds of thousands of dollars in unnecessary tax. The cost of getting it right? A few hours of strategic planning with your accountant.
At CMK Accountants, we've been helping farming families navigate trust structures and tax planning for nearly 70 years. We understand that tax law shouldn't get in the way of smart business decisions, and we're here to make sure it doesn't.If you're considering winding up your family trust, or if you've already started the process, let's have a conversation. We can review your specific situation, identify any risks, and develop a plan that protects your hard-earned wealth from unnecessary taxation.
