Imputation and franking credits explained for NZ and Australian investors

When a New Zealand or Australian company pays a dividend, it has usually already paid tax on the profits behind it. Both countries use an imputation system so that shareholders aren't taxed twice on the same profit. New Zealand calls the credits imputation credits; Australia calls them franking credits. They work the same way, with one big catch: each only works in its own country.

The basic idea

1. A company earns a profit and pays company tax on it.
2. It pays a dividend out of the after-tax profit.
3. It attaches a credit for the tax already paid.
4. The shareholder declares the dividend plus the credit as income, then uses the credit to reduce the tax they owe.

The result is that the profit is taxed once, at roughly the shareholder's own tax rate.

Imputation credits in New Zealand

The New Zealand company tax rate is 28%. A fully imputed dividend carries the maximum credit: 28/72 of the cash dividend.

Worked example

You receive a fully imputed cash dividend of $72.

• Imputation credit: $72 × 28/72 = $28
• Gross dividend (taxable income): $72 + $28 = $100

The company has effectively prepaid 28% tax. If your tax rate is higher, you owe the difference.

Resident withholding tax (RWT)

Dividends paid to New Zealand residents usually have resident withholding tax deducted to top up the tax already covered by imputation credits. The RWT rate on dividends is generally 33% of the gross dividend, less the imputation credit. For a fully imputed dividend, that's an extra 5% of the gross amount ($5 in the example above).

If your personal tax rate is lower than 33%, you may be over-taxed and can get a refund through your end-of-year assessment. If you don't give the share registry your IRD number, the higher non-declaration rate can apply, so it's worth checking it's on file.

Partly imputed and unimputed dividends

Not every dividend is fully imputed. Companies with overseas earnings, or that have used tax losses, may pay partly imputed or unimputed dividends. More RWT is deducted on these because less company tax has been prepaid. The dividend notice states the imputation credit for each payment.

Franking credits in Australia

The Australian company tax rate is 30%, or 25% for smaller "base rate entities". A fully franked dividend carries a credit for the full company tax paid.

Worked example

You receive a fully franked cash dividend of $70 from a company paying 30% tax.

• Franking credit: $70 × 30/70 = $30
• Grossed-up dividend: $100

Australian residents include $100 in taxable income and claim the $30 credit. If their tax rate is below 30%, eligible Australian residents can receive excess franking credits as a refund.

Why each only works on its own side

• New Zealand residents can't use Australian franking credits. They aren't creditable against New Zealand tax.
• Australian residents can't use New Zealand imputation credits.

That's why the same dividend is worth more to a local shareholder. It also explains why some trans-Tasman companies think carefully about where their shareholders are.

What New Zealanders do get from franking

Fully franked dividends paid to New Zealand residents aren't subject to Australian non-resident withholding tax. Unfranked dividends have withholding tax deducted, generally capped at 15% for New Zealand residents under the double tax agreement. So franking still helps, just not as a tax credit.

Trans-Tasman imputation

Since 2003, an Australian company with New Zealand operations can attach New Zealand imputation credits to its dividends, representing New Zealand tax it has paid. New Zealand shareholders can use these. ANZ is the best-known example. Similarly, a New Zealand company can attach Australian franking credits for Australian tax paid, which benefit Australian shareholders.

How to read a dividend announcement

Look for:

• Cash amount per share, and its currency.
• Imputation or franking level: "fully imputed", "50% franked", "unfranked" and so on.
• Supplementary dividend. Some New Zealand companies pay an extra amount to non-resident shareholders to offset non-resident withholding tax.
• Key dates: ex-dividend date, record date and payment date. See ex-dividend dates explained.
• Dividend reinvestment plan (DRP): whether you can take shares instead of cash, sometimes at a discount.

Comparing yields fairly

A 5% cash yield fully imputed isn't the same as a 5% yield with no imputation. To compare, gross up the yield:

• NZ fully imputed: gross yield ≈ cash yield ÷ 0.72
• Australian fully franked (30%): gross yield ≈ cash yield ÷ 0.70

But only gross up credits you can actually use. A New Zealand investor comparing an NZX utility with an ASX bank should gross up the NZX dividend, not the Australian one.

Frequently asked questions

What does fully imputed mean?

A fully imputed dividend carries the maximum imputation credit, representing 28% New Zealand company tax already paid on the profit. The credit equals 28/72 of the cash dividend.

What does fully franked mean?

A fully franked dividend carries a credit for the full Australian company tax paid on the profit, usually at 30%. The credit equals 30/70 of the cash dividend for a 30% taxpayer company.

Can New Zealanders claim franking credits?

No. Franking credits can only be used against Australian tax. Fully franked dividends paid to New Zealand residents are free of Australian withholding tax, though.

Why was tax deducted from my NZ dividend if it was fully imputed?

Resident withholding tax on dividends tops up to 33%. A fully imputed dividend has 28% already covered, so an extra 5% of the gross dividend is usually deducted. If your tax rate is lower, you may get a refund at the end of the year.

Do I need to declare dividends in my tax return?

Dividends are taxable income. In New Zealand, RWT is often the final tax for many people, but you may need to file if your situation is more complex. Check with IRD or a tax adviser.