Imputation Credit
Imputation credits prevent the same company profit being taxed twice — once at the company level and again when it's paid out as a dividend to shareholders. When a company distributes profit as a dividend, it can attach ('impute') a credit representing the company tax already paid on that profit, up to a maximum ratio of 28/72 of the cash dividend (roughly 38.89 cents of credit per dollar of cash dividend), capped by the actual company tax paid.
Adding the imputation credit to the cash dividend gives the 'grossed-up' dividend — the amount actually included in the shareholder's taxable income. The shareholder pays personal income tax on the grossed-up amount at their own marginal rate, then offsets the imputation credit already attached against that liability, so the company-paid tax isn't paid again by the shareholder.
Because the maximum imputation ratio (28/72) mirrors the 28% company tax rate, a fully imputed dividend to a shareholder on the 33% or 39% marginal rate still leaves some further personal tax to pay (the gap between 28% and their marginal rate) — imputation eliminates double taxation, but doesn't eliminate the shareholder's higher personal rate.
How it works
Imputation credits are tracked by the company through an imputation credit account (ICA), which records the running balance of company tax paid that's available to attach to future dividends. A company can only attach credits up to the balance actually sitting in its ICA — it cannot impute more credit than the tax it has genuinely paid, which is why a company with losses or tax credits reducing its cash tax paid may only be able to partially imprint dividends, or not at all.
For the shareholder, the grossed-up dividend (cash dividend plus attached credit) is what actually appears as taxable income on their return, not just the cash received — this catches some investors by surprise the first time they see a dividend statement, since the taxable figure is larger than the amount that landed in their bank account. The credit itself is then applied dollar-for-dollar against the shareholder's tax liability on that grossed-up amount.
Because the maximum credit ratio tracks the 28% company tax rate exactly, shareholders on the 10.5% or 17.5% marginal rates can actually end up with excess imputation credits relative to their own tax liability on the dividend, though NZ generally doesn't refund unused imputation credits to individual shareholders the way it does for some other franking-credit systems — the credit simply offsets tax owed and any excess is not refunded to individuals in the way PIE tax settings sometimes work.
Example: grossing up a fully imputed dividend
A company pays a shareholder a cash dividend of $72, fully imputed at the maximum 28/72 ratio. The attached imputation credit is $28 (28/72 x $72), giving a grossed-up dividend of $100 that the shareholder must include in taxable income.
If the shareholder's marginal tax rate is 33%, tax on the $100 grossed-up amount is $33. Subtracting the $28 imputation credit already attached leaves $5 of further personal tax to pay on top of what the company already paid.
Frequently asked questions
Why did I receive a smaller dividend payment than the amount shown as taxable income?
Because the taxable amount includes the imputation credit attached to the dividend as well as the cash you received — the credit represents company tax already paid on your behalf and isn't cash paid to you directly.
Do unused imputation credits carry forward if I don't need them all this year?
Imputation credits aren't refundable in cash. If your credits exceed your tax liability for the year, the excess isn't lost outright — it's converted into a tax loss that carries forward to reduce your taxable income in a future year.
Can a company attach more imputation credit to a dividend than the tax it has actually paid?
No — a company can only attach credits up to the balance in its imputation credit account, which reflects tax it has genuinely paid, so a company with no tax paid or exhausted credits may pay an unimputed dividend instead.
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