Imputation credits explained

Quick answer

When a New Zealand company pays tax at 28% on its profit, it banks an imputation credit for that tax. When it later pays a dividend, it can attach those credits, so you get recognition for the tax already paid. You then pay only the difference between 28% and your personal rate, instead of being taxed on the full amount all over again.

The system exists so that profit is ultimately taxed once, at the shareholder's own rate, rather than at the company rate and then again at the personal rate on the same dollars.

The detail, in plain English

Picture company profit being taxed, then taxed a second time when it reaches shareholders. That double hit is exactly what the imputation system prevents.

Every company keeps an imputation credit account (ICA). It goes up when the company pays income tax and down when it attaches credits to dividends. A dividend with full credits attached is fully imputed; one with none is unimputed and taxed harder in your hands.

On your side, a dividend is grossed up and taxed at your personal rate, but the imputation credit counts as tax already paid. The arithmetic for a 33% shareholder receiving company profit looks like this:

So the $100 of profit is taxed at your 33% rate in total, not 28% plus 33%. A shareholder on a rate below 28%, say 17.5%, may have excess credits; for individuals those generally cannot be refunded, but they can offset tax on other income in the same year. There is also a resident withholding tax overlay on some dividends, which is effectively a prepayment of that top-up.

Two account-management points matter. The ICA must not go into deficit at 31 March, or the company faces a further liability and penalty. And the company can only attach credits it has actually accumulated, so paying a large dividend before the matching tax is paid can leave it unable to fully impute.

A simple example

Hemi owns his company outright and is on the 33% personal rate. The company makes $50,000 profit, pays $14,000 of tax (28%), and distributes the rest as a fully imputed dividend. Hemi's dividend is grossed up to $50,000, taxed at 33% ($16,500), and reduced by the $14,000 credit, leaving $2,500 of top-up tax. He is not taxed twice on the same profit, only brought up to his own rate.

If Hemi's spouse, on the 17.5% rate, held some shares instead, her grossed-up dividend taxed at 17.5% would be less than the credit attached, so the surplus credit would offset her other income rather than be refunded in cash. That difference in rates is part of why share ownership within a family is worth planning.

Common mistakes to avoid

• Paying dividends with an empty ICA. If the company has not paid enough tax, it cannot fully impute, and the dividend is taxed harder.
• Forgetting to gross up. The taxable dividend is the cash plus the credit, not just the cash you received.
• Expecting a refund of surplus credits. For individuals, excess imputation credits offset other income rather than being paid out in cash.
• Letting the ICA fall into deficit at year-end. A negative imputation account at 31 March creates a further tax liability and a penalty.
• Timing dividends before the tax is paid. Credits can only be attached once they have been accumulated.

Where this fits in your return

The company tracks credits through its imputation credit account and reports dividends and credits in its IR4. As a shareholder, the grossed-up dividend and its credit go on your IR3, alongside any resident withholding tax deducted. Because dividends are not always fully taxed at source, they can feed into your provisional tax as well.

How Fernway can help

We keep your imputation account in good order, make sure dividends are fully imputed where possible, and stop the account drifting into deficit at year-end. On the personal side, we gross up and credit your dividends correctly so you are taxed once, at your rate, not twice, and we coordinate any family share ownership so credits are not wasted. See shareholder salary vs dividends for how this drives the way you pay yourself.

This is general information only, current at the time of writing, and not personalised tax advice. Tax rules change and your circumstances may differ, so confirm your position with us or check ird.govt.nz before you act on it.

In plain English: imputation credits hand you the company tax already paid, so a dividend only ever tops your tax up to your own rate.