What are imputation credits?

Wednesday 23rd January 2002 1 Comment

Q: WestpacTrust announced a div of 37.3905cps with 18.4162cps imputation credits - does this mean that only (37-18)cps are subject to taxation?

A: To avoid double taxation of dividends the government introduced imputation credits. Any company that does business in NZ pays tax on any profits they make. Listed companies pass this tax credit to shareholders by way of imputation credits. Dividends can be fully or partially imputed or carry no imputation at all. In your example, every share will receive 37.3905 cents worth of dividend with imputation credits of 18.4162 cents of tax already paid. So if you own 100 shares you will receive $37.90. You may not have to pay tax on this money because WPT has paid $18.41 to the IRD already. If you earn over the 39% tax threshold you may be liable to pay additional tax.

Because companies pay tax at the rate of 33% but individuals have varying tax rates depending on their level of income, you may still be liable for tax if you are taxed at the higher rate of 39%. If you are taxed at a lower rate, say 19%, and your dividend income is not your only form of income, then you could be entitled to a refund.

Many married couples register their shares in the name of the partner who earns the least income. Consider this example. A woman works part-time and is on the lower tax rate of 19%. Her husband works full-time but, if dividend income was to be included in his total income, his income would go over the 39% tax threshold. The couple therefore registers the shares they own in the wife's name for maximum tax efficiency.

Comments from our readers

On 9 August 2010 at 11:49 am David said:

So what would the scenario be if I received a 59.1 dollar dividend with 100% imputation? I am on the top tax rate.