Imputation basics
Important
The information provided here offers a plain English summary of imputation. Be aware that this is only a non-legislative introduction to the concepts. Read the Imputation guide (IR274) or get advice from your tax agent or professional adviser about the more detailed rules, before acting on this information.
It will be easier for you to understand Inland Revenue's information about imputation, if you understand the terms shown in bold through the below explanations. Keep in mind that this information uses terms as defined by the Income Tax Act 2007, some of which have been changed or may be unfamiliar. (The redefined terms are listed near the end of this page.)
- What is imputation?
- How does it work?
- Limitations
- Imputation and RWT
- Imputation credits versus FDP (foreign dividend payment) credits
- Changed imputation-related terms
- Find out more
What is imputation?
Imputation is a mechanism that a company can use to pass on credits for tax it has paid on its profits, to its shareholders when it pays them dividends. These imputation credits offset the amount of tax that the resident shareholders would otherwise be liable to pay on those dividends, so they don't have to pay "double tax".
How does it work?
When a company pays income tax, it gains that amount of imputation credits. The company records these credits (amongst other types of credit entries) in a memorandum account known as the ICA (imputation credit account). All New Zealand resident companies must maintain an ICA.
When a company decides to distribute dividends to its shareholders, it can choose to allocate some of those imputation credits by attaching a certain amount of them to the dividend payments, ie it imputes the dividends. Distributing the credits creates a debit of the same amount, which the company again records in its ICA (among other types of debit entries).
Some companies can find themselves on both sides of imputation transactions. Such a company may:
- gain any imputation credits that are attached to dividends it receives, if it is a shareholder of another company, and
- pass those credits on to its own shareholders, attached to dividends it pays out.
At the end of the year
The company must complete and file an Annual imputation return (IR4J) (also called an ICA return) with Inland Revenue for each tax year (1 April to 31 March), based on the information it has recorded in its ICA for that year. If the return shows a debit balance, the company is penalised.
When the company's New Zealand resident shareholders each complete their annual income tax returns, they declare both their gross dividend income (which includes the cash amount and the credits) and the imputation credits. They only have to pay more income tax if the total imputation credits are not enough to cover the tax that is due on the gross dividends. (Overseas shareholders don't gain any benefit from New Zealand imputation credits.)
Limitations
- The amount of imputation credits that a company can attach to any dividend distribution is capped, relative to the amount of the dividend. This maximum imputation ratio is currently 30:70, meaning up to $30 of imputation credits can be attached to every $70 of dividends or, in other terms, the gross dividend can include imputation credits up to 42.85% of the dividend's cash value amount.
- Imputation credits are conceptual monetary amounts only: they have no cash value.
- If a company has more imputation credits in its ICA return than it has allocated to its shareholders, it cannot claim their value as a tax refund. Such credits can be either carried forward to the next tax year, or used to pay off certain other types of tax liabilities that the company may have.
- If a shareholder receives more imputation credits than the amount of tax they are liable to pay for their dividend income, they cannot claim any excess back as a tax refund. Instead, they can carry it forward to the next tax year.
Imputation and RWT
Dividends that a shareholder receives are resident passive income, which is liable for RWT (resident withholding tax). The rate of RWT is 33%.
When a company distributes a dividend (without imputing it), it must deduct 33% RWT from the dividend amount and pay that to Inland Revenue - unless the person it is paying has an RWT exemption. However, any imputation credits that are attached to a dividend serve to offset any amount of RWT that the company must deduct.
The end result is that the shareholder receives the same cash amount of dividend, regardless of how much of the tax component of the total dividend amount is made up of imputation credits or of RWT. (The combination should always total 33% for shareholders who are not exempt from RWT.)
See Resident withholding tax (RWT) for more details.
Imputation credits versus FDP (foreign dividend payment) credits
Imputation credits are gained, distributed, and claimed when the company is in New Zealand (or Australia, under certain circumstances).
If a company in New Zealand is a shareholder of an overseas company, it may also receive their dividends. It is liable to pay FDP to Inland Revenue as tax on such income, and gains FDP credits for these payments. It can then attach these credits to its shareholders? dividends in exactly the same way as imputation credits.
Like imputation credits, the amount of FDP credits a company can attach is limited by the maximum FDP ratio (currently 30:70). If it attaches both some imputation and some FDP credits to a dividend, it looks at the combined total of credits for observing the maximum imputation/FDP ratio, and calculating the amount of RWT to deduct.
A company can choose to maintain an FDP account to record its FDP credits and debits specifically. If it chooses not to, it records these credits and debits in its ICA.
Changed imputation-related terms
A range of tax terms have been redefined in the Income Tax Act 2007. This list shows the terms used above that have changed:
- "ICA" replaces "imputation credit account". (This is now used globally instead of simply as an abbreviation for the full term.)
- "FDP" (foreign dividend payments) replaces "foreign dividend withholding payment" or FDWP.
- "FDP account" replaces "withholding payment account (WPA)".
- "FDP credit" replaces "DWP credit".
- "Passive income" replaces "withholding income".
- "RWT" replaces "resident withholding tax". (This is now used globally instead of simply as an abbreviation for the full term.)
- "Tax year" replaces "imputation year". (Note that the concept of "tax year" already existed.)
Find out more
- Read our booklet on Imputation (IR274) for full technical details about imputation in New Zealand (and some details about FDP)
- See Key messages about the change of company tax rate for a summary, or read our fact sheet Imputation and the company tax rate change (IR237) for full details of how imputation is affected by the 2009 reduction in the company tax rate
- Get a copy of the Imputation credit account return (IR4J) for more information about how to complete and file your annual return
- See Trans-Tasman Imputation for more information about how imputation operates between Australia and New Zealand companies and shareholders
- Read our booklet FDWP (IR273) for an overview of FDP.
Date published: 25 Jul 2008
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