Understanding dividends and imputation credits in New Zealand

It’s always nice receiving dividends. You receive the money in your bank account and it’s already been taxed at the source – just like interest from the bank. Ever thought about the other side – the company paying out the dividends? Or what would be needed for your own company to declare dividends?​

Dividends are one way for a company to distribute profits to its owners (shareholders). Before a company can declare a dividend, the directors must be satisfied that a solvency test be met:​

Another, more common method, is to allocate the profit as a shareholder salary. ​

Dividends are income to the person receiving them. However, dividends come from company profits after tax has been paid. If the person receiving the dividend was required to pay full tax on the dividend income, it would be double taxation (the profit is taxed in the company, then the after-tax profits taxed again on dividend income to the shareholder). ​

Imputation Credits (ICs) mitigate a portion of this. An imputation credit is a credit for tax already paid by the company – it’s passed onto the shareholders and ‘attached’ to the dividend generally at 28%.​

Dividends must be taxed at 33%. As the New Zealand company tax rate is 28%, the company needs to top-up tax paid to Inland Revenue. The extra 5% is paid by the company as Dividend Withholding Tax (DWT). ​

The dividend going out to the shareholders is now what we call ‘fully-imputed’. Although the dividend is taxable income to each shareholder, the shareholder can reduce the tax charge by including the ICs and DWT as tax credits.​

Here is a demonstration of how this would work in the most simplest of cases:​

Company 2024 profit before tax: 200,000
Less tax charge for the company: 56,000
Profit which is added to retained earnings: 144,000

Net dividend paid out from retained earnings: 144,000

Tax paid by the company on the profit: 56,000
Additional 5% DWT to ensure the dividend is fully imputed: 10,000​

Gross dividend received by shareholder: 200,000

Tax charge for the shareholder: 66,000
Use the tax paid by the company on profit: - 56,000
Company has paid DWT and we can also use that - 10,000​

The shareholder will only have additional tax to pay on the dividend if their total taxable income puts them in the 39% tax bracket.

The company’s dividend statement will show the number of ICs and DWT – you don’t need to work it out yourself.​

In order to keep track of the tax credits available to pass on, the company must maintain a notional account known as the Imputation Credit Account (ICA). This account records all the tax transactions – tax payments, tax refunds, ICs forfeited*, ICs attached to dividends paid, RWT paid on interest etc.​

Once a dividend has been issued, the balance in the imputation credit account held by the Company reduces by the amount of tax attached to the dividend.​

Following on from the Dividends section above, here is an example of a simple ICA:​

Opening balance 1 April 2024 (from previous years): 4,500
Add income tax paid by the company: 56,000
Company also paid RWT on interest it received: 2,600
Maximum IC's the company can attach to dividends: 63,100

Less IC's attached to dividends paid out: 56,000
Closing balance 31 March 2025: 7,100

* The most common reason for ICs to be forfeited is where shareholders have changed during the year​

Because only companies use dividends to pass profits to their owners (shareholders), they are the only type of entity required to maintain an ICA. This does not extend to look-through companies, where all profits are passed directly to the owners without requiring a dividend.​

At the end of the year, the company files a return with Inland Revenue which details what has happened in their ICA that year. Your accountant will collate and file this for you as part of your tax return, and will also keep a record of all the transactions that have taken place in your Imputation Credit Account.​

There are situations when the company can have a debit balance in the ICA. If this occurs as a closing balance, the company must pay an amount to Inland Revenue to clear the balance back to $0, plus a 10% penalty.​

The main cause of the debit balance usually centres around dividends being overpaid or a loss of shareholder continuity, so it’s important that your accountant assists with calculating the amount and setting the timing of dividends.​

If you earn over $180,000 in a tax year, you will be paying tax at 39% on every dollar over $180,000. If you receive a dividend, the tax credits attached are only at 33%. This will result in an additional 6% tax to pay when you file your end-of-year tax return. Please take this into consideration when planning your tax obligations.​

Similar to business losses, Inland Revenue believes that in order to benefit from the tax paid by a company, you need to be a shareholder when the tax is actually paid. In order not to lose (forfeit) any imputation credits, a company needs to have a minimum of 66% of the same shareholders from the date the tax was paid until the date they’re passed on to the shareholders.​

If you’re thinking about changing any shareholdings in your business, talk to your accountant first so that you can maintain the best tax position possible.​

A franking credit is the Australian equivalent of an imputation credit. Unfortunately, if you receive a dividend with franking credits attached, you’re unable to claim those as tax paid in your New Zealand tax return. Some Australian Companies pay New Zealand tax as well, and will attach this as Imputation Credits to your dividend – these you can claim.​

As you can see, paying dividends is complex. Problems can easily develop if you get the timing and/or amounts wrong.​

Beany can take the uncertainty out of the process by calculating the dividend, imputation credits, and dividend withholding tax. We also prepare the required legal documentation, such as director(s) resolution, insolvency certificate, the dividend statements sent to shareholders, and filing the dividend withholding tax return. Clients can access this service for a one-off charge. Reach out to client support for more information.​

We understand accounting and tax can be overwhelming - and we are here to take the weight off your shoulders. Beany's certified accountants and friendly team can help you manage your accounting and tax needs. We carefully interpret and apply tax rules to enable you to stay compliant and pay the least amount of tax legally possible.​​

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