Imputation credits are a key feature of the New Zealand tax system for shareholders. This article explains how these credits work to prevent double taxation on company profits distributed as dividends.
Dividends from New Zealand companies often come with an attached "imputation credit." For shareholders, these credits can reduce their income tax liability, effectively preventing company profits from being taxed twice – once at the company level and again in the hands of the shareholder. Understanding how imputation credits work is crucial for investors in the New Zealand share market.
The Principle of Imputation
New Zealand operates a full imputation system. This means that when a New Zealand-resident company earns profits, it pays company tax at a rate of 28%. When these after-tax profits are then distributed to shareholders as dividends, the company can attach imputation credits representing the tax already paid.
For example, if a company earns $100 and pays $28 in company tax, it has $72 left to distribute as a dividend. If it fully imputes this dividend, it means the $28 tax paid by the company is attributed to the shareholder. The shareholder then receives the $72 cash dividend and an imputation credit of $28.
How Imputation Credits Affect Shareholders' Tax
When a shareholder receives an imputed dividend, they declare both the cash dividend and the imputation credit as income. This is sometimes referred to as "grossing up" the dividend. The imputation credit then acts as a tax credit against their overall income tax liability.
Consider a New Zealand resident shareholder receiving an imputed dividend:
- Cash dividend received: $72
- Imputation credit: $28
- Total taxable income from dividend: $72 (cash) + $28 (credit) = $100
If the shareholder's marginal tax rate is 33%, their total tax on this $100 income would be $33. However, because they have an imputation credit of $28, their additional tax to pay on this dividend is only $5 ($33 - $28). If their marginal tax rate is 28% or lower, the imputation credit would fully cover the tax on the dividend income. In some cases, if the imputation credits exceed the tax payable on the dividend income and the shareholder's other income, a refund of excess imputation credits may be possible, as outlined by Inland Revenue's guidance on imputation for companies.
Non-Resident Shareholders and PIE Funds
The benefits of imputation credits are primarily for New Zealand resident individuals and certain entities. Non-resident shareholders often cannot utilise New Zealand imputation credits directly.
For investors holding shares through a Portfolio Investment Entity (PIE) fund, the tax treatment of dividends is different. PIEs have their own tax rules, and generally, imputation credits are utilised within the PIE structure itself rather than passing directly to the individual investor. The PIE's tax rate, often capped at 28% for individual investors, means that the benefit of imputation credits is effectively passed on through the PIE's lower tax liability on its investment income, as noted in the FMA's guide to shares and investment returns.
What to Watch
Investors should always check a company's dividend statements to see the extent to which dividends are imputed. Companies are not always required to fully impute dividends, and the imputation rate can vary. This information is typically provided with dividend payments and can also be found in company announcements on the NZX website.
This article is for general information only and is not personalised financial advice. Seek advice from a licensed financial adviser (registered on the FSPR) for guidance specific to your situation.