How are dividends taxed in New Zealand, and what are imputation credits used for?

Dividends received by New Zealand resident shareholders are taxed under a system designed to ensure that company profits are taxed only once—either at the company level or the shareholder level. This mechanism relies on Imputation Credits (IM).

### Imputation Credits (IM)

When a New Zealand resident company pays tax on its profits, it generates Imputation Credits. These credits are attached to the dividend paid to the shareholder, effectively representing the tax the company has already paid on that profit. The standard company tax rate (currently 28%) determines the value of the imputation credit attached to the dividend.

### Taxation of Dividends

When you receive a dividend, you must include both the cash amount received and the attached imputation credit in your assessable income for the year. This grossed-up amount is added to your total income, and you are taxed on it at your marginal income tax rate.

The Role of Imputation Credits:

Imputation credits serve to reduce your final tax liability. The credits attached to the dividend are offset against the tax you owe on that dividend income. Since the imputation rate (28%) is often lower than the top personal income tax rates (up to 39%), this often results in a tax refund or a lower overall tax bill for the shareholder.

Formula Illustration (Simplified):

$$\text{Tax Payable on Dividend} = (\text{Dividend Received} + \text{Imputation Credits}) \times \text{Marginal Tax Rate} - \text{Imputation Credits}$$

If the total imputation credits attached to your dividends exceed the tax you owe on those dividends, you generally receive the excess amount back as a refund, unless the excess credits result from receiving dividends that were taxed at a higher rate than your marginal rate (e.g., foreign dividends without full imputation).

### Unimputed Dividends and RWT

Dividends that do not have imputation credits attached (e.g., from foreign companies or certain New Zealand entities) are taxed purely as income. If the payer is a New Zealand entity, they may withhold Resident Withholding Tax (RWT) at the time of payment. This RWT acts as a prepayment against your final income tax liability on that dividend.