Dividend Imputation Credits: How Tax-Paid Dividends Work in NZ

What Are Imputation Credits?

When a New Zealand company earns a profit, it pays 28% company tax to IRD. When that company later distributes a dividend to shareholders, the tax already paid can be passed on as an imputation credit — essentially a receipt proving the company has already paid tax on that money.

This prevents double taxation. Without imputation credits, the company would pay 28% tax on profits, and then you’d pay your full marginal rate on the dividend — meaning the same income gets taxed twice.

How Imputation Credits Work

Here’s the mechanics, step by step:

1. Company earns $100 in profit
2. Company pays $28 in tax (28% rate)
3. Company distributes $72 as a cash dividend
4. The dividend carries a $28 imputation credit
5. You declare $100 gross income ($72 cash + $28 credit)
6. Your tax on $100 is calculated at your marginal rate
7. The $28 credit offsets your tax liability

The result at different tax rates

The table below assumes the dividend is your only income, so the whole $28 credit has to find its home within the $100 of dividend income. See “What if I have other income?” below — that changes the answer a lot.

If your rate is above 28%, you pay the top-up and the dividend ends up taxed at exactly your marginal rate.

If your rate is below 28%, the credit is bigger than the tax it has to cover — and this is the part most explanations get wrong. The difference is not paid out to you in cash. Excess imputation credits are not refundable. They are carried forward to the next tax year, where they can reduce that year’s tax bill. Inland Revenue’s IR274 puts it plainly: “If they receive excess imputation credits, these are not refundable”, and its treatment table tells individuals to “Carry excess forward to reduce any tax liability in the following year.”

So in the 10.5% row, the $100 of company profit has still borne 28% tax in that year. You hold a $17.50 credit that is only worth something later, and only if you have tax to pay against it.

What if I have other income?

This is the case that actually applies to most people, and it is much better news. Imputation credits are offset against your total tax payable for the year — not just the tax on the dividend. Inland Revenue’s individual income tax return guide is explicit that an excess only arises “if your total imputation credits (including any excess imputation credits brought forward from last year) are greater than your total tax payable.”

So if you earn a salary, the credits attached to your dividends reduce the tax on your salary too. A carryforward only happens when your credits exceed your whole year’s tax bill — which for most salary earners with a modest share portfolio simply never occurs.

Maximum Imputation Ratio

The maximum imputation credit ratio is 28/72 — meaning for every $72 of cash dividend, the maximum credit is $28. This matches the 28% company tax rate.

A dividend can be:

• Fully imputed: The full 28/72 credit is attached. The company has paid the maximum tax.
• Partially imputed: Only some credits attached. Common when a company has foreign income or insufficient imputation credits.
• Unimputed: No credits. You pay tax on the full cash amount at your marginal rate.

Resident Withholding Tax (RWT) on Dividends

NZ companies must deduct RWT when paying dividends to resident shareholders. The rate is 33% of the gross dividend (cash plus imputation credit), reduced by the imputation credit attached.

For a fully imputed $72 dividend with $28 credit:

• RWT rate: 33% of gross ($100) = $33
• Less imputation credit: −$28
• RWT deducted from cash: $5
• You receive: $72 − $5 = $67 in hand

The $5 RWT and $28 imputation credit are both shown as tax credits on your assessment — but they are not the same kind of credit, and Inland Revenue’s return guide separates them in one sentence: “If the credits are RWT, they are used to offset tax payable with any excess refundable… If they’re imputation credits, they are used to reduce tax payable” — with any imputation excess carried forward instead.

So if your actual rate is lower than 33%:

• Over-withheld RWT is refundable. It is money that was paid to IRD on your behalf, and the annual assessment squares it up in cash.
• Excess imputation credits are not. They are carried forward to next year’s return.

Both show up on the same assessment, which is why the two get conflated so often. Keep them apart: the $5 is a payment, the $28 is a receipt for tax the company already paid.

RWT on dividends is fixed at 33%

Unlike interest — where you can elect a rate matching your marginal tax rate — the RWT rate on dividends is fixed at 33% and cannot be lowered by supplying your IRD number and a different rate. If your marginal tax rate is below 33%, you don’t get an over-withholding refund from electing a lower dividend rate; you get it (partly) from imputation credits reducing the RWT bill, and any remaining over-withholding is squared up through your annual income tax assessment.

Worked Example

Emma earns a $90,000 salary and receives a fully imputed dividend of $5,000 cash from her NZ shares.

Step 1 — Gross up the dividend:

• Cash received: $5,000
• Imputation credit: $5,000 × (28/72) = $1,944
• Gross dividend: $5,000 + $1,944 = $6,944

Step 2 — Calculate tax on the dividend: Emma’s salary puts her in the 33% bracket ($78,101–$180,000).

• Tax on $6,944 at 33% = $2,292

Step 3 — Apply credits:

• Imputation credits: $1,944
• RWT already deducted: $348 (33% of $6,944 − $1,944)
• Total credits: $2,292

Result: Emma’s credits exactly match her tax liability — she has nothing extra to pay and no refund on the dividends. The effective tax rate on the underlying company profit is 33%, matching her personal rate.

The contrasting case: not enough tax to absorb the credit

Ruth is retired with no other taxable income. She receives the same fully imputed $5,000 cash dividend.

• Imputation credit: $1,944 → gross dividend $6,944
• RWT deducted: 33% of $6,944 = $2,292, less the $1,944 credit = $348
• Ruth’s income tax on $6,944, all within the 10.5% bracket: $729

Her $1,944 imputation credit is far larger than her $729 of tax. The first $729 is used; the remaining $1,215 is carried forward to next year, not refunded. The separately deducted $348 of RWT is refundable and comes back in her assessment.

Ruth banks $5,000 − $348 = $4,652 during the year, then gets the $348 RWT back — $5,000 in total. If the excess imputation credit were refundable the way many explanations imply, she would have received $6,215. Emma and Ruth hold the same shares and receive the same dividend; the difference is entirely whether there is enough other tax liability for the credit to offset.

Imputation Credits and PIE Funds

If you invest through a Portfolio Investment Entity (PIE) such as a KiwiSaver fund or managed fund, imputation credits work differently. PIE funds use your Prescribed Investor Rate (PIR) — capped at 28% — and tax is handled within the fund. You don’t need to declare PIE income or claim imputation credits on your personal return.

This is one reason PIE funds can be more tax-efficient for earners in the 33% or 39% brackets — the maximum PIR is 28%, whereas direct share ownership taxes dividends at your full marginal rate.

For a comparison, see the PIE vs direct investment calculator.

Key Takeaways

• Imputation credits prevent double taxation — they represent company tax already paid at 28%
• If your rate is above 28% you pay a top-up and the dividend lands on your marginal rate
• If your rate is below 28%, the unused credit is not refunded — excess imputation credits are carried forward to next year’s return
• Credits offset your total tax for the year, not just the tax on the dividend, so an excess only arises when your credits exceed your whole tax bill
• Excess imputation credits are not refundable; over-withheld RWT is. Both appear on the same assessment — don’t confuse them
• Maximum imputation ratio is 28/72 per dollar of cash dividend
• RWT is deducted at 33% by default, reduced by imputation credits
• RWT on dividends is fixed at 33% — you cannot elect a lower rate the way you can on interest; over-withholding is squared up via your annual assessment
• PIE funds cap tax at 28% — potentially better than holding shares directly for higher earners

Use the dividend tax calculator to see exactly how imputation credits affect your after-tax dividend income.