What is Imputation Credits (New Zealand)?

Dividend imputation was introduced in New Zealand in 1988 alongside Australia's franking system, both designed to eliminate classical double taxation where a company's profits were taxed once at the corporate level and again when distributed to shareholders.

**How the ICA Works** Every company subject to NZ income tax must maintain an imputation credit account (ICA). The account is credited when the company pays income tax, and debited when imputation credits are attached to dividends. The company may only attach credits up to the maximum permissible ratio.

**The 28/72 Ratio in Practice** The maximum ratio reflects the 28% company tax rate: a company that earned NZD 100, paid NZD 28 tax and has NZD 72 to distribute can attach no more than NZD 28 in credits to a NZD 72 dividend. The 28/72 ratio is sometimes expressed as 63.89 credits per NZD 100 of gross dividend. A dividend is fully imputed if it carries the maximum credits; it can also be partly imputed (fewer credits) or unimputed (no credits).

**Shareholder Tax Treatment** When a shareholder receives a dividend, they include the cash plus any attached credits as gross income. They calculate the income tax on the gross amount at their marginal rate, then deduct the imputation credits as a tax credit. If credits exceed the tax liability, the excess is refunded (since 2007, for resident individuals). This means shareholders on the 28% rate or below receive a full refund of credits in excess of their liability, effectively receiving a tax-free dividend.

**ICA Deficit and Penalty Tax** If a company attaches more credits than the 28/72 maximum, or its ICA goes into deficit at its balance date, a 10% imputation penalty tax applies on the deficit amount. This is in addition to any shortfall penalties. Companies must monitor their ICA carefully when they have paid dividends in advance of tax being finalised.

**Shareholder Continuity for ICA** To carry forward imputation credits from one year to the next, the company must maintain 66% shareholder continuity. This is a higher bar than the 49% continuity required for carrying forward losses. If continuity drops below 66%, the ICA balance forfeits at the date continuity was lost.

**Resident Withholding Tax (RWT) on Dividends** Even for imputed dividends, a company must withhold RWT on the cash component if the shareholder has not provided a tax rate or is on a non-declaration rate. The RWT deducted offsets the shareholder's terminal tax. Fully imputed dividends paid to companies in the same wholly-owned group are exempt from RWT.