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.
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:
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:
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.
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:
If a shareholder has an RWT exemption no RWT is deducted.
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.
Noah received an imputed net dividend of $402. On his dividend statement Noah finds this was made up of:
Because the imputation credit and RWT has to total 33% of the gross dividend, we need to work out how much RWT to deduct.
Because of the imputation credit, Noah only pays RWT of $98 and gets a net dividend of $402.
Taylor received a net dividend of $335. On her dividend statement Taylor finds this was made up of:
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.