franking credit (Australia)
Imputation credit
A tax credit attached to a NZ company dividend that represents company tax already paid on the underlying profit, used by the shareholder to offset their personal tax on the dividend.
New Zealand uses a full dividend-imputation system. When a NZ-resident company pays company tax (currently 28%) on its profits and then distributes a dividend out of those profits, the dividend carries an imputation credit equal to the company tax already paid. The shareholder grosses up the dividend, applies their own marginal rate, then uses the imputation credit to offset the tax owing.
For a fully imputed dividend, a NZ-resident shareholder on a marginal rate of 28% pays no further tax on the dividend; on a 33% marginal rate, a small top-up is owed; on a 39% rate, more is owed. PIE funds receive imputation credits on their NZ-share dividends and pass them through to investors at the investor's PIR.
Imputation is a NZ feature; the Australian equivalent is the franking-credit system. Most overseas jurisdictions do not impute — foreign dividends from non-imputing countries are taxed without offset, which is one structural reason FIF-method tax is applied to most foreign-share holdings.
Worked example: a NZ company earns $100 of profit, pays $28 company tax, and distributes the remaining $72 as a fully imputed dividend with a $28 imputation credit attached. A shareholder grosses up to $100 of taxable income. At a 28% marginal rate the $28 of tax owing is fully covered by the credit — no further tax. At 33%, tax owing is $33, so $5 is payable after the credit. At 39%, $11 is payable. The credit is company tax already paid being recognised, not a bonus.
Common questions
- Do managed funds pass imputation credits to investors?
- PIE funds use imputation credits received on their NZ-share dividends to reduce the tax calculated at your PIR — the benefit flows through in the fund's tax calculation rather than as a line you claim yourself. This is one reason NZ-share PIE funds are tax-efficient for NZ residents relative to holding the same shares via structures that cannot use the credits.
- Can NZ investors use Australian franking credits?
- Generally no. Australian franking credits attach to Australian company tax and are not creditable against NZ tax for NZ residents (and NZ imputation credits are likewise generally useless to Australian residents) — the two systems never merged, despite long-running trans-Tasman debate. This asymmetry is part of why after-tax returns on Australian shares differ between the two countries' investors.
- What happens to imputation credits if a dividend is only partly imputed?
- Companies can attach credits at any ratio up to the maximum. A partly imputed dividend carries proportionally smaller credits, so more top-up tax is owed by the shareholder. A fund's NZ-dividend income is a blend of imputation levels across its holdings.
Primary sources
Related terms
-
RWT
Resident Withholding Tax (RWT)
Tax that NZ banks and bond issuers deduct at source from interest payments to NZ-resident investors, at the investor's nominated RWT rate.
-
PIE fund · PIE
Portfolio Investment Entity (PIE)
A tax-efficient New Zealand fund structure where investor tax is capped at the investor's Prescribed Investor Rate (PIR), with a maximum of 28%.
-
FIF rules
Foreign Investment Fund (FIF)
A New Zealand tax regime that taxes NZ-resident individuals on the holding of most foreign shares and non-PIE foreign funds above a NZ$50,000 cost-basis de minimis threshold.