As noted in our previous update, Fonterra is changing the tax treatment of payments made for wet shares from the 2025 income year. These payments will now be treated as dividends for income tax purposes.

To explain, Fonterra operates as a wholesaler of milk purchased from farmers. Supplying farmers are also shareholders in Fonterra and they own shares in proportion to the amount of milk solids they supply (adjusted year on year). These shares are typically referred to as “wet” shares because they are backed by the supply of milk.

In addition to the “wet” shares, farmer suppliers may acquire further shares in Fonterra, and these shares are known as “dry” shares because they are not backed by the supply of milk.

Tax treatment of dividends

Dividends are taxable income. To offset the tax payable, Fonterra will attach imputation credits to the dividend. These credits can be used by recipients to reduce their tax liability. The dividend is gross, meaning it includes the value of the imputation credits.

Some members have reported that Resident Withholding Tax (RWT) is still being deducted for company shareholders; however, any RWT withheld should be refundable when the return is filed.
Fonterra has published guidance and examples explaining the new tax treatment. We recommend reviewing their commentary.

Sharemilking arrangements

For sharemilkers, the impact of the change will depend on the terms of the sharemilking agreement.

If both the farm owner and sharemilker are Fonterra shareholders, a proportion of the Fonterra dividend will go to the sharemilker.

However, some sharemilker agreements are a contract for services with the payment calculated by reference to the amount of the Fonterra dividend. If that is the case, the amount paid by the farm owner to the sharemilker is a payment for services supplied. It is not a dividend payment. In that situation, the imputation credits will remain with the farm owner shareholder. In addition, the amount paid to the sharemilker will need to be grossed up for GST.

No change in economic outcome

Although the tax treatment has changed, the underlying economic result is expected to remain the same. Where shareholders were previously paying provisional tax on milk income, they will now receive imputation credits through the dividend instead.

We encourage members to review documentation and sharemilking arrangements to ensure clarity under the new treatment.

If the arrangements are complex we suggest you consult with a specialist rural tax advisor. If you would like us to put you in touch with a member who is a specialist in this area you are welcome to contact us.