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.