Imputation Credits = Tax Savings!
15 Sept, 2024
I’ve got a super short blog post for you this week where I am answering a question that is often asked: What is an imputation credit?
*I’ve used IRD as my primary resource to write this post.
If you are a share investor (including ETFs), you will pay tax at your personal tax rate on any dividend income that you receive. You must also be aware of any tax credits available to you due to your dividend income. These are called Imputation Credits, and you can use them to reduce the overall income tax you pay.
The imputation system was introduced to make sure that, as far as possible, company profits are taxed once only, at the marginal tax rate of the company’s shareholders. Before this, a company paid income tax on its profits, and then the shareholders (you and I) paid tax again when the company's profits were distributed to us as dividends.
This system is designed to avoid double taxation of company profits. A company will attach an imputation credit to your dividend payment to enable you to reduce the overall income tax you need to pay personally.
In New Zealand, here’s how it works:
Company Taxation: A company pays corporate income tax on its profits.
Dividends Distribution: When the company distributes these profits as dividends to shareholders, it can attach imputation credits to the dividends. These credits represent the tax the company has already paid on those profits.
Shareholder Taxation: Shareholders receive these dividends and the attached imputation credits. This is a credit for the tax already paid. When shareholders report their income to the IRD and calculate their personal income tax, they can use the imputation credits to offset their tax liability.
The goal of this system is to prevent the same income from being taxed twice—once at the corporate level and again at the shareholder level. The imputation system ensures that the total tax paid on distributed profits aligns more closely with the individual shareholder’s tax rate.
Below is an example of a letter I received from Smartshares where the imputation credits are clearly labelled:
This $455.32 imputation credit can reduce my overall tax liability.
How do I do this?
Each time I receive a dividend with Smartshares twice a year in June and December, I keep the document they send me that shows these imputation credits. You will note that it says:
IMPORTANT: This statement should be retained for tax purposes.
Make sure you keep your dividend statements!
I forward these to the company that handles my accounts (Hnry), and they apply those credits to my tax information. If you do your accounts, you can go directly to the MyIr (IRD) website and enter them yourself.
If you want to get even deeper into the weeds of imputation credits, here is a handy 32-page guide titled ‘Imputation’ created by IRD in 2022. 😊
You are leaving money on the table by ignoring imputation credits, so make sure you track them down and apply them to your end-of-year personal tax return. They may mean the difference between paying a tax bill or receiving a tax refund.
