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This is a brief overview of how imputation works in New Zealand. For more detailed information download our Imputation (IR274) guide, or get advice from your tax agent or tax advisor.
- What imputation is
- How imputation credit accounts work
- How the imputation credit account balance affects income tax
- Attaching imputation credits to dividends
- Imputation credits reduce the amount of income tax shareholders pay on their dividend
- Find out more information on dividends
Imputation lets a company share the tax it has paid on its income with shareholders when it pays dividends.
Most New Zealand resident companies must keep an imputation credit account (ICA). An ICA is a record-keeping account used to keep track of how much income tax the company has paid, and how many imputation credits it still holds that it can pass on to its shareholders.
When a company pays income tax, it gains the same amount of imputation credits in its ICA.
When a company pays dividends to its shareholders, it can choose to attach some of its imputation credits to the dividends - it can impute the dividends. This creates a debit of the same amount in the ICA.
Some other credits and debits are entered in the ICA, including:
- residential land withholding tax (RLWT) deducted from the sale of residential property
- resident withholding tax (RWT) from interest or dividends the company has received.
Because an ICA is only a record-keeping account to keep track of income tax credits and debits, its balance has no monetary value.
Every year a company must complete an Annual imputation return (IR4J) - based on the information recorded in its ICA. If the ICA closing balance is a:
- credit - it can't be refunded. ICA credits can be either carried forward to the next tax year, or used to pay off certain other types of tax liabilities the company may have.
- debit - a penalty will apply because the company has passed on more income tax than it has actually paid.
Income tax and the ICA balance at the end of the year
if a company has an income tax credit after filing its company tax return (IR4), it will only get a refund up to the value of the ICA credit balance.
Income tax and the ICA balance during the year
If during the year a company has paid too much provisional tax, it can apply for a refund. An interim (part year) IR4J needs to be completed to show too much tax has been paid so far.
If you use the accounting income method (AIM) for provisional tax, you don't need to complete an interim IR4J to get a refund of overpaid provisional tax during the year.
The amount of imputation credits a company can attach to a dividend is capped at a ratio of 28:72. This ratio means up to $28 of imputation credits can be attached to every $72 of dividends.
The attached imputation credit can be any amount up to the cap.
There are transitional rules to allow credits for tax paid at 30% to be imputed at that rate until 31 March 2013.
The resident withholding tax (RWT) rate for dividends is 33% of the gross dividends. The gross dividend is either:
- the amount of the dividend before RWT - if no imputation credits are attached, or
- the amount of the dividend before RWT plus any attached imputation credits.
If a shareholder has an RWT exemption no RWT is deducted.
The combination of imputation credits and RWT must total 33%
The combination of imputation credits and RWT must total 33% of the gross dividend - unless the shareholder has an RWT exemption. This means when a company attaches imputation credits to a dividend, the shareholder pays less RWT and gets a greater net dividend. The following examples explain the difference when an imputation credit is attached to a dividend.
Example of imputed dividend and RWT
Noah received an imputed net dividend of $402. On his dividend statement Noah finds this was made up of:
- gross dividend $600
- cash value of dividend $500
- imputation credits $100
- RWT $98, and
- net dividend $402.
Because the imputation credit and RWT has to total 33% of the gross dividend, we need to work out how much RWT to deduct.
- Work out the total RWT on the gross dividend.
33% of $600 = $198
- Minus the imputation credit from the total RWT.
$198 - $100 = $98
Because of the imputation credit, Noah only pays RWT of $98 and gets a net dividend of $402.
Example of non-imputed dividend and RWT
Taylor received a net dividend of $335. On her dividend statement Taylor finds this was made up of:
- gross dividend (and cash value of dividend) $500
- RWT $165, and
- net dividend $335.
Because there is no imputation credit to reduce the RWT, 33% of the gross dividend is deducted. In this case Taylor pays RWT of $165 and only gets a net dividend of $335.
Dividends from a listed portfolio investment entity (PIE) do not have RWT deducted.
If a shareholder receives more imputation credits than the amount of tax they are liable to pay for their dividend income, they can’t claim any excess back as a tax refund. Instead, they carry them forward to the next tax year.
- Our Imputation (IR274) guide has the full technical details about imputation in New Zealand.
- The Imputation credit account return (IR4J) has more information about how to complete and file your annual return.
- Go to our Trans-Tasman imputation page for more information about how imputation operates between Australia and New Zealand companies and shareholders.