What Are Imputation Credits? (Quick Answer)
Imputation credits are tax credits attached to dividends paid by New Zealand companies. They represent the company tax (28%) already paid on profits distributed as dividends. For NZ tax residents, these credits reduce your income tax liability dollar-for-dollar and can even result in tax refunds.
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How This Calculation Works:
The imputation credit is calculated as: (Dividend ÷ 0.72) - Dividend. For a $100 dividend: ($100 ÷ 0.72) - $100 = $38.89. You pay tax on the gross dividend ($138.89) but receive a credit for tax already paid ($38.89), resulting in net tax of only $2.78.
How Imputation Credits Work
The imputation credit system prevents double taxation of company profits. When a New Zealand company pays tax on its profits and then distributes some of those profits as dividends, the imputation credits represent the tax already paid.
Step-by-Step Process
Company Earns Profit
Company makes $1,000 profit before tax
Company Pays Tax
Company pays 28% tax = $280, leaving $720 after-tax profit
Dividend Distributed
Company pays out $720 as fully imputed dividends
Imputation Credits Attached
$280 of imputation credits are attached to the $720 dividend
Shareholder Receives
Shareholder gets $720 cash + $280 imputation credits
Tax Credit Applied
Credits reduce shareholder's tax on the $1,000 gross dividend
Benefits of Imputation Credits
Reduces Tax Liability
Imputation credits directly reduce your income tax liability dollar-for-dollar. If you owe $1,000 in tax and have $300 in imputation credits, you only pay $700.
Can Result in Refunds
If your imputation credits exceed your tax liability, you can receive a tax refund. This is particularly beneficial for investors in lower tax brackets.
Boosts Effective Returns
Imputation credits can significantly increase your effective dividend yield, especially if you're in a lower tax bracket than the company tax rate (28%).
Unique to NZ Residents
Only New Zealand tax residents can benefit from imputation credits, giving local investors a significant advantage over international investors.
Impact by Tax Rate
The benefit of imputation credits varies depending on your marginal tax rate. Here's how different tax brackets benefit:
Example: $100 Cash Dividend with Full Imputation
| Tax Rate | Income Range | Tax on Gross | Imputation Credit | Net Cash | Effective Yield |
|---|---|---|---|---|---|
| 10.5% | $0 - $14,000 | $14.58 | $38.89 | $124.31 | +24.3% |
| 17.5% | $14,001 - $48,000 | $24.31 | $38.89 | $114.58 | +14.6% |
| 30% | $48,001 - $70,000 | $41.67 | $38.89 | $97.22 | -2.8% |
| 33% | $70,001 - $180,000 | $45.83 | $38.89 | $93.06 | -6.9% |
| 39% | $180,000+ | $54.17 | $38.89 | $84.72 | -15.3% |
Key Insight: Investors in lower tax brackets benefit most from imputation credits, while those in higher brackets may find the benefit reduced or even negative compared to the cash dividend alone.
Real-World Examples
Example 1: Retiree (17.5% Tax Rate)
Scenario:
- • Owns 1,000 Spark (SPK) shares
- • Receives $125 dividend (12.5¢ per share)
- • Fully imputed at 28%
- • Tax rate: 17.5%
Calculation:
- • Cash dividend: $125
- • Imputation credit: $48.61
- • Gross dividend: $173.61
- • Tax on gross (17.5%): $30.38
- • Net benefit: $143.23
Result: The retiree receives 14.6% more than the cash dividend alone thanks to imputation credits!
Example 2: High Earner (39% Tax Rate)
Scenario:
- • Owns $50,000 of ANZ shares
- • Receives $3,000 annual dividend
- • Fully imputed at 28%
- • Tax rate: 39%
Calculation:
- • Cash dividend: $3,000
- • Imputation credit: $1,166.67
- • Gross dividend: $4,166.67
- • Tax on gross (39%): $1,625
- • Net benefit: $2,541.67
Result: The high earner receives 15.3% less than the cash dividend due to higher tax rate, but still benefits from avoiding double taxation.
Important Considerations
NZ Residents Only
Imputation credits are only available to New Zealand tax residents. Non-residents cannot claim these credits and are subject to Non-resident Withholding Tax (NRWT) instead.
Not All Dividends Are Fully Imputed
Some companies may pay partially imputed or unimputed dividends, especially if they have overseas income or carry forward tax losses. Always check the imputation rate when evaluating dividend investments.
Must Be Declared in Tax Return
Both the cash dividend and imputation credits must be declared as income in your tax return. The imputation credits then reduce your tax liability. Your broker should provide you with the necessary tax statements.
PIE Funds vs Direct Shares
Direct shareholdings benefit from imputation credits, but PIE funds (like most ETFs) have different tax treatment. PIE funds are taxed at your Prescribed Investor Rate (PIR), maximum 28%, but you don't directly receive imputation credits.
Official Resources & Further Reading
For official information about imputation credits and dividend taxation in New Zealand, consult these authoritative sources:
- Inland Revenue (IRD) - Imputation Credits Explained
Official tax authority guidance on how imputation credits work and how to claim them
- NZX (New Zealand Stock Exchange)
Browse NZX-listed companies and their dividend announcements
- Complete NZ Dividend Tax Guide
Comprehensive guide covering RWT rates, PIR rates, and tax strategies for dividend investors
- Dividend Investing for Beginners
Learn the fundamentals of building a dividend income portfolio
Imputation Credit FAQs
What is an imputation credit?
An imputation credit is a tax credit attached to dividends paid by New Zealand companies. It represents the company tax (28%) that has already been paid on the profits being distributed. When you receive a dividend with imputation credits, you can use these credits to reduce your personal income tax liability, preventing the same income from being taxed twice.
How do I calculate imputation credits?
To calculate imputation credits: divide your cash dividend by 0.72, then subtract the original dividend. For example, a $100 cash dividend: ($100 ÷ 0.72) - $100 = $38.89 imputation credit. The gross dividend is $138.89 ($100 + $38.89). You pay tax on the gross amount but receive the credit, effectively avoiding double taxation.
What is a fully imputed dividend?
A fully imputed dividend means the company has attached the maximum possible imputation credits (28%) to the dividend. This happens when the company has paid full NZ company tax on its profits. Partially imputed dividends occur when companies have tax losses or foreign income. Unimputed dividends have no credits attached.
Can I get a refund from imputation credits?
Yes, if your imputation credits exceed your tax liability, you can receive a tax refund. This is particularly beneficial for investors in the 10.5% or 17.5% tax brackets. For example, if you're on the 17.5% rate and receive fully imputed dividends, the 28% imputation credits will more than cover your tax, resulting in a refund of the difference.
What is the difference between imputation credits and franking credits?
Imputation credits (NZ) and franking credits (Australia) work similarly - both prevent double taxation of company profits. The main difference is the tax rate: NZ imputation is based on 28% company tax, while Australian franking is based on 30%. Both systems allow shareholders to claim credits against their personal tax, but each country's credits only apply to that country's tax residents.
Do all NZ dividends have imputation credits?
No, not all NZ dividends have imputation credits. Dividends from overseas companies have no imputation credits. Some NZ companies pay unimputed or partially imputed dividends due to overseas earnings, tax losses carried forward, or insufficient imputation credit balances. Always check the imputation rate on your dividend statement.